1. The document outlines a brand valuation methodology used to estimate the value of the HP, IBM, and Dell brands. 2. Financial reports were analyzed to forecast cash flows over 5 years and in perpetuity, brand strength and role in purchase decisions were surveyed. 3. IBM was valued highest at $39,980 million, followed by HP at $23,980 million, and Dell at $557 million based on discounting brand earnings using brand strength-adjusted discount rates derived from Interbrand's methodology.

1. 1

2. Brand Tracker
Phase III – Brand Valuation
A report submitted to
Prof. Govindrajan
In 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

3. Executive Summary
During the 1980’s there was spate of mergers and acquisitions wherein a trend was observed
that the acquiring companies were paying over and above the book value of the acquired company. This
enigma was resolved when experts came up with the theory that the brands have an inherent value of
their own. This time period was the birth period of the concept of the brand valuation. Brand valuation
is the process in which the total financial value of the brand is estimated. There are several
methodologies that are used for brand valuation but there is no universal methodology that can be used
for the valuation of all the brands. Interbrand’s brand valuation method comes the closest to being a
standardised method to value brands.
Interbrand’s method measures brand value under three pillars viz. financial performance of the
organization, role of the brand in the purchase decision and strength of the brand to ensure expected
future earnings. For the purpose of our research, a variation of this method was used to estimate the
value 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 the
estimated economic profits for the next five years as well as till perpetuity. The CAGR which was used to
forecast the future cash flows was assumed by analysing industry reports. To calculate the role of
branding index and brand strength score a survey was undertaken with the help of questionnaire and
with a sample size of 50.
The brand value was calculated by multiplying the economic profit or the intangible earnings
and subsequently discounting it with the discounting rate derived from the brand strength score. HP
was valued at USD 23980.83 million while IBM was the leader with USD 39980.23 million and DELL stood
at meager USD 557.484 million.
From this exercise we recommend that HP should emulate the strategies followed by IBM, IBM
should continue with its innovative policies as well as its strategic acquisition policies and incorporate
the brand in its operational execution and decision making. Dell on the other hand must go for an
aggressive brand building campaign to differentiate the brand DELL from its products.
3

4. Table of Contents
Executive Summary…………………………………………………..…………..…….….….. 3
Defining Brand Valuation…….……………………………………….…………………….. 5-9
Brand Valuation Approaches.…………………………………….………………….….… 10-12
Brand Value Measurement – Interbrand Model ………………………...……..… 13-18
Measurement of Brand Value………………………………………………………..…..… 13-18
Recommendation………………………………………………………………………………… 19-22
Annexure…………..…………………………….…………………………………………………… 23-31
Reference………….………………………………….………………………….…………………… 32
4

5. 5

6. 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 what
the brand stands for. To the company that owns the brand it is a future generator of cash flows. A brand
exists only because of its commitment to its internal values. Without that it is just a glorified product
name. Determining the value of the brand is usually a combination of direct and indirect measures. A
direct 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 a
service of one seller in order to differentiate them from other competitors selling the same kind of
goods or services. This makes a brand very valuable to the company that it belongs to
How did brand valuation originate?
There was a wave of brand acquisition in the 1980’s that exposed the hidden value in highly branded
companies. This brought brand valuation into the forefront. This included Nestle buying Rowntree,
Grand Metropolitan buying Pillsbury and Danone buying Nabisco’s European businesses. The amount
being paid to acquire strongly branded companies was increasingly higher than the net value of the
tangible assets in the books of the companies. This resulted in huge amounts of “good will” arising on
the 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 key
to the successful running of any business. The values associated with the product or services are
communicated through the brand to the consumer. Consumers no longer want just a service or product
but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream
secured by loyalty of customers who have ‘bought into’ the brand.
6

7. 7

8. Most brand valuations models are classified into 2 categories
a. Research based approach
b. Purely financially driven approach
Research based approach
There are several brand equity models that use consumer data to assess the relative strength and
performance of the brand. But the drawback of this is that it does not take into account any of the
financial aspects of the brands. Thus it essentially does not take into consideration the future cash flows
that the brand would generate which is the most essential reason for the existence of the brand. The
research based methods use consumer loyalty and buying behavior that have an impact on the
economic performance of the brand. All these models try to interpret and measure the consumer’s
perception towards the brand. This includes various perceptive measures such as awareness,
knowledge, familiarity, relevance, purchase considerations, preference, satisfaction and
recommendation.
But these methods do not take into consideration the effects of certain factors like R&D and the design
of the brand. Thus they do not provide a clear link between specific market indicators and the financial
performance 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

9. Financially driven approach
1. Cost based approaches
This method defines the value of the brand as all the cost incurred to bring the brand to the current
state. This is the sum of the developmental costs, marketing cost, advertising cost, sales cost and other
promotional cost etc. This is not a very accurate method for valuing a brand because there is no direct
relation between the costs incurred and the value added to the brand. Also for very old brands like Coca
cola which has been in existence for over 100 years, calculating this cost would not be possible.
2. Comparable Approach
Another approach of valuing a brand is on the basis of comparison. But this is very difficult as the reason
for the existence of a brand is to create differentiation and thus there is no comparison possible.
3. Price Premium approach
It is the value calculated as the net present value of the future price premiums that the brand can
generate over unbranded and generic competition. But most brands are intended not only top charge a
premium but also to secure future cash flows for the company by generating demand. The value
generation of these brands is in securing future volumes rather than securing premium prices. This is a
flawed method for products which do not have generic competition to which the premium price can be
compared.
4. Economic use approach
Approaches that are driven exclusively by brand equity measures or financial measures lack either the
financial or the marketing component to provide a complete and robust assessment of the economic
value of brands. The economic use approach, which was developed in 1988, combines brand equity and
financial measures, and has become the most widely recognized and accepted methodology for brand
valuation. It has been used in more than 3,500 brand valuations worldwide. The value of the brand is
thus defined as the net present value of the future earnings generated by the brand.
9

10. 10

11. Interbrand’s Brand Valuation Methodology
Measures the Measures that Measures the ability
FINANCIAL PERFORMANCE
BRAND STRENGTH
ROLE OF BRAND
organisation's 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
Activation
Interbrand’s approach is on the following 3 economic functions. This is the most adopted respected
economic 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

12. 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 its
organization from attracting and retaining talent to delivering on customer expectations. The brand
value obtained can be used to guide strategic brand management so that the businesses can make
better and more informed decisions. There are 3 key aspects that contribute to the assessment; the
financial performance of the branded products and services, the role of the brand in the purchase
decision 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 and
Differentiation.
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

13. 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 owners
viii. 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

14. 14

15. 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

16. 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

17. 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 WACC
Industry 100 9.46%
HP 60.95 15.52%
IBM 61.77 15.31%
DELL 59.88 15.80%
17

18. Brand Valuation
• All the present values of the future cash flows including the terminal cash flows were added to
arrive 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 2011 12% 12% 13% 12% 11%
2012 2013 2014 2015 2016
Total Net Revenues 102546 114852 128634 145356.1 162799 180706.7
Cost of Sales 56061 62827 70366 79513 89055 98851
Cost of Sales as a % of Revenue 55% 55%
Gross Margin 46485 52025 58268 65843 73744 81856
R&D 6312 7000.768 3551.713 4013.436 4495.048 4989.503
Cost of R&D as a % of Revenue 6.16% 6.10%
Depreciation 3857 4409.666 4938.826 5580.873 6250.578 6938.141
Depreciation as a % of Revenue 3.76% 3.84%
Overheads 23712 25679.56 28761.11 32500.05 36400.06 40404.07
Overheads as a % of revenue 23.12% 22.36%
EBITA 12604 14935 21016 23748 26598 29524
Applicable Taxes 3151 3734 5254 5937 6650 7381
NOPAT 9453 11201 15762 17811 19949 22143
Total Assets 127066.2 142314.2 159391.9 180112.8 201726.4 223916.3
Current Liabilities 45429 50880.97 56986.69 64394.96 72122.35 80055.81
NET PPE 81637 91433.22 102405.2 115717.9 129604 143860.5
Capital Charge 7674 8595 9626 10877 12183 13523
Intangible Earnings 1779 2606 6136 6934 7766 8620
Role of Branding Index
Brand Earnings 1096.82 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

19. DELL Forecasted
2011 12% 12% 13% 12% 11%
2012 2013 2014 2015 2016
Total Net Revenues 63895 71562 80150 90569.39 101438 112595.9
Cost of Sales 51745 58505 65525 74044 82929 92051
Cost of Sales as a % of Revenue 80.98% 81.75%
Gross Margin 12150 13058 14624 16526 18509 20545
R&D 813 796.616 892.21 1008.197 1129.181 1253.391
Cost of R&D as a % of Revenue 1.27% 1.11%
Depreciation 700 815.5285 913.3919 1032.133 1155.989 1283.148
Depreciation as a % of Revenue 1.10% 1.14%
Overheads 8879 8520.32 9542.759 10783.32 12077.32 13405.82
Overheads as a % of revenue 13.90% 11.91%
EBITA 1758 2925 3276 3702 4146 4602
Applicable Taxes 352 585 655 740 829 920
NOPAT 1407 2340 2621 2962 3317 3682
Total Assets 45868 51372.62 57537.33 65017.19 72819.25 80829.37
Current Liabilities 24881 27866.75 31210.76 35268.16 39500.34 43845.38
NET PPE 20987 23505.87 26326.57 29749.03 33318.91 36983.99
Capital Charge 1973 2210 2475 2796 3132 3476
Intangible Earnings -566 131 146 165 185 205
Role of Branding Index
Brand Earnings -342.033 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
HP Forecasted
2011 12% 12% 13% 12% 11%
2012 2013 2014 2015 2016
Total Net Revenues 126831 142050 159096 179778.9 201352 223501.2
Cost of Sales 96263 108053 121019 136752 153162 170010
Cost of Sales as a % of Revenue 75.90% 76.07%
Gross Margin 30568 33997 38077 43027 48190 53491
R&D 3233 3685.018 987.7843 1116.196 1250.14 1387.655
Cost of R&D as a % of Revenue 2.55% 2.59%
Depreciation 3368 3601.114 4033.248 4557.57 5104.479 5665.972
Depreciation as a % of Revenue 2.66% 2.54%
Overheads 13185 14872.58 16657.29 18822.74 21081.47 23400.43
Overheads as a % of revenue 10.40% 10.47%
EBITA 10781 11839 16399 18531 20754 23037
Applicable Taxes 2156 2368 3280 3706 4151 4607
NOPAT 8625 9471 13119 14825 16604 18430
Total Assets 134394 150521.3 168583.8 190499.7 213359.7 236829.3
Current Liabilities 55331 61971.12 69407.66 78430.65 87842.33 97504.99
NET PPE 79063 88550.16 99176.18 112069.1 125517.4 139324.3
Capital Charge 7432 8324 9323 10534 11799 13096
Intangible Earnings 1193 1147 3797 4290 4805 5333
Role of Branding Index
Brand Earnings 734.0434 705.8212 2335.624 2639.256 2955.966 3281.123
Brand Strength Score
Brand Discount Rate
Discounted Brand Earnings 610.9948 1750.204 1712.024 1659.857 1594.911
19
Terminal Growth Rate 15918.79
Brand Value 23980.83

20. 20

21. Inferences and Recommendations
HP
• 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

22. 22

23. Questionnaire
Please select "only" one option per brand
* Required
Rate 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 5
IBM
HP
DELL
Rate 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 (legal
protection, proprietary ingredient, design, scale or geographic spread)
1 2 3 4 5
IBM
HP
DELL
Rate 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 and
defining their customer
1 2 3 4 5
IBM
HP
23

24. 1 2 3 4 5
DELL
Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for
"responsiveness" *Responsiveness - the brand's ability to adapt to market changes, challenges and
opportunity
1 2 3 4 5
IBM
HP
DELL
Rate 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 if
it can deliver against customer's expectations
1 2 3 4 5
IBM
HP
DELL
Rate 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 customer's needs, decision and decision criteria
across all appreciate demographics and geographies
1 2 3 4 5
IBM
HP
24

25. 1 2 3 4 5
DELL
Rate 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 discuss
it in both traditional and social media
1 2 3 4 5
IBM
HP
DELL
Rate 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 and
charecteristics
1 2 3 4 5
IBM
HP
DELL
Rate 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 5
IBM
HP
25

26. 1 2 3 4 5
DELL
Rate 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 positioning
that is distinct to its competition
1 2 3 4 5
IBM
HP
DELL
Submit
26

27. 


27