The brand capability value of integrated marketing communication (IMC).
It is now widely accepted that intangible assets provide the most sustainable source of competitive advantage (Barskey and Marchant 2000; Leadbeater 2000; Litman 2000). Indeed, brand equity often accounts for a major portion of shareholder value. However, Ratnatunga, Gray, and Balachandran (2004)
As Fortini-Campbell (1994) points out, organizations do not integrate marketing for its own sake; they do so to have an effect in the marketplace--to grow sales and strengthen brands. IMC combines and converts tangible and intangible inputs into outputs. However, measuring the commercial success (or otherwise) of IMC has proved difficult (Eagle and Kitchen 2000). This paper examines the extent to which the CEVITA[TM] (Capability Economic Value of Intangible and Tangible Assets) approach, recently developed by Ratnatunga, Gray, and Balachandran (2004), can be adapted and applied to the budgeting and valuation of IMC processes.
IMC AND BRAND PERFORMANCE
The search for reliable methods to assess communications effects can be traced to the earliest writings on advertising in the nineteenth century. In fact, the current emphasis on marketing measurement and the "bottom line" (Ambler 2000) is arguably stronger than at any point in the discipline's history. Various attempts have been made to value brands, and the notion of brand equity has attracted considerable attention. Customers are increasingly being viewed as assets, with tangible equity (Blattberg and Deighron 1996) and lifetime value (Pitt, Ewing, and Berthon 2000). A strong case is also being developed to view marketing as an investment rather than as an expense (Almquist and Wyner 2001; Zyman 1999), and a concomitant research stream is focusing on apportioning marketing expenditure between customer acquisition and customer retention (e.g., Neckermann 2004). Integrated marketing communication (IMC) has the potential to be a leading contributor to, and central player within, this new paradigm. In fact, calls to measure IMC's ROI (return on investment) were made more than a decade ago (Wang 1994). IMC is considered critical to organizational performance because it provides competitive advantage via cash flow and shareholder value (Eagle and Kitchen 2000). However, the extant literature has hitherto failed to expressly demonstrate IMC's contribution to brand performance (Baker and Mitchell 2000; Cornelissen 2000; Low 2000), for, as both Ambler (2000) and Jones (2005) warn, advertising/marketing expenditure will only be considered seriously in the boardroom when it is presented within an acceptable financial reporting frame work. The present study hopes to advance that worthwhile cause in some way.
STUDY RATIONALE AND RESEARCH OBJECTIVES
Our approach begins with the contention that the value of an organization's asset capabilities is highly context-dependent. For example, although accountancy practices and advertising agencies both depend heavily on human capital, they do so in quite different ways. A qualification and experience-based measure appropriate for a firm of accountants may not be especially relevant in an ideas-based advertising agency. Lave and Wenger (1991) argue that contextual knowledge is created primarily through the ongoing interactions and improvisations that an organization's employees undertake to perform their jobs. Indeed, they state that this learning could be regarded as a product of a community, that is, as organizational learning rather than individual learning. There is synergy to the capability measure of an organization, which may be greater than the sum of the individual parts. This can increase during the process of learning, and any drop in one component may reduce the total in excess of the individual component's worth. Because such lessons learned cannot easily be transferred from one setting to another, any measures developed to value such assets should consider such contextual settings.
The preceding discussion suggests that even if tangible assets (such as salespeople, billboards, point-of-sale merchandise, samples, catalogues) and intangible assets (brands, logos, trademarks, advertising jingles, slogans, patents, and copyrights) (1) can be valued, what is especially difficult in practice is the valuation of the associated tacit knowledge and judgment required to combine these differing assets to enhance the capability of the organization. This paper will explore how these tangibles and intangibles can be integrated to give a company a source of competitive advantage--in other words, how they should be recognized as the organization's capabilities, rather than as assets or capital in some fixed sense. It will then provide a practical approach to value and report such capability values in the IMC and brand management arenas.
Valuation difficulties plague most tangible and intangible assets in their own rights, let alone how they combine to form asset capabilities. The impetus to consider asset capabilities as against asset values draws inspiration from a study undertaken by Ratnatunga, Gray, and Balachandran (2004) for the Australian Department of Defence (DOD). The DOD's publicly available Annual Report has two components: a financial section that follows generally accepted accounting principles (GAAP), and another section that accounts for Australia's defense capabilities in terms of resourcing costs (e.g., strike capability, surveillance capability, ground-based air defense capability, amphibious lift capability, etc.). Ratnatunga, Gray, and Balachandran (2004) offered a valuation approach to link the two DOD reports. This paper seeks to extend some of the key findings from the DOD study by applying them in a commercial context, specifically, by providing a theoretical framework for the valuation of marketing activities. (See the Appendix for a glossary of accounting terms used in this paper.)
VALUATING INTANGIBLES
Several responses to the intangible asset valuation problem have been presented in the financial literature (see Keller 2003; Leadbeater 2000; Ratnatunga 2002; Sveiby 1997), but there is a distinct lack of theory underpinning these approaches. While the theoretical foundations of organizational capabilities and contextual knowledge accumulation (see Lave and Wenger 1991; Orlikowski 2002; Teece, Pisano, and Shuen 1997) are fairly well developed, notable gaps exist in terms of valuing the effect of asset combinations in the context of organizational capabilities. Thus, there is a need to develop a theoretical framework to underpin a model developed specifically for the valuation of marketing communication capabilities.
Capabilities are sometimes referred to as the distinction between "knowing" and "knowledge" (Polanyi 1967; Ryle 1949), or as Schoen (1983) states, "our knowing is in our action"; or, more specifically, the essential role of human agency in knowledgeable performance is critical (Orlikowski 2002). This paper extends Schoen's observation further by considering the role of human agency and tangible hardware. For example, does an Apple Mac computer have any value to an ad agency if there are no trained creative staff to use it? Thus, at the core of the paper is the theoretical question "Should the valuation of assets be based on what one has or what one can do?" We believe that the answer is the latter, and therefore that marketing activities should be viewed in the context of what an organization does to enhance its brand equity, and ultimately, its economic value. For example, Orlikowski (2002) provides a comprehensive case study of a company that has developed significant capabilities in global product development. She identified a repertoire of practices that constitute organizational capability, from collective know-how to repeatedly enacting competence over time. Orlikowski (2002) suggests, therefore, that "knowing" is not a static embedded capability or stable disposition of actors, but rather an ongoing social accomplishment, constituted and reconstituted as actors engage the world in practice. These same arguments can be extended to marketing capabilities and brand value.
Teece, Pisano, and Shuen (1997) propose a "dynamic capabilities" approach in which a firm's strategic dimensions are its managerial and organizational processes (essentially, its decision-making capabilities); its present competitive position (e.g., technological capability and intellectual property, customer base, communication capabilities, supplier relations); and the paths open to it (technological trajectories and business opportunities). For example, understanding competitive advantages that accrue from IMC requires viewing firms as a blend of interacting relationships, resources, organizational values, and technology. This interaction sometimes creates path dependencies that lead to unique resources or context-dependent assets, which increase in value to owners and consumers, especially if the competitors find it hard to imitate such capabilities. Similarly, Lave and Wenger (1991) contend that there is a strong link between knowledge and society, and that this is based on the idea that, in its essence, knowledge has a practical nature. In other words, knowledge, far from being an abstract matter based on a factual representation of reality, is closely linked to the context of social practices, which are created, generated, and reshaped within an organization.
Traditional Approaches to Valuing Intangibles
The more traditional valuation responses suggest taking one or more of three approaches to value tangible assets--that is, replacement cost, income projections, and market valuation--and extending them to value intangibles. However, Ratnatunga (2002), Leadbeater (2000), Barsky and Marchant (2000), and others agree that these approaches do not work well for most intangibles. For example, assessing the full costs of replacement is quite challenging in terms of marketing assets, as often the tangible and intangible components are almost inseparable. This is particularly the case where the role of human agency in knowledge performance is salient (see Schoen 1983), such as in an auto dealership. Here, although one can ascertain the replacement cost of the bricks and mortar, catalogues, displays, and so forth, and even, for that matter, the stock in trade (the automobiles), ascertaining the replacement cost of the salesperson's product knowledge and flair would be a very difficult task.
In terms of income projections, this method is also inappropriate in that it is difficult to isolate the income attributable to an intangible, especially where it is wrapped up with a tangible product. For example, what proportion of a car dealership's income from sales would be the result of the salesperson's expertise (intangible) as against that from the physical asset of the automobile (tangible)?
Alternative Approaches to Valuing Intangibles
More contemporary approaches to valuing intangibles take the view that while many of the assets that make up an organization's capability may not be visible, they can still be measured and managed (see MERITUM 2002). The argument is that if managers want to cultivate intellectual and other intangible resources, they need to develop performance measures that link internal productivity to market value. The question is, How does one link reasonably objective financial statement measures to the somewhat subjective measures of intangibles, such as intellectual capital or creative capability?
There have been numerous attempts to make this link and to more reliably value intangibles. First, there are a number of new approaches to performance measurement and internal corporate reporting using modified discounted cash flow techniques and accrual accounting adjustments. Second, there are the index-based measures, such as the balanced scorecard. These typically attempt to link financial performance to intangible drivers such as employee morale and customer satisfaction (Kaplan and Norton 1992), and then link this financial performance to a company's share market valuation. Third, there are the measures that attempt to directly value intangibles such as brands, patents, R&D, and customer loyalty by either linking them to market values if a market exists, or if not, by obtaining a consensus of their likely market values. These approaches are not mutually exclusive. Different kinds of measures might be more relevant to different stakeholders. Some are designed primarily to give managers and workers a clearer picture of the strengths and weaknesses of their organization and to change the way they think and act. Others may be designed to help analysts and investors assess the contribution that these intangible assets make to the financial performance of the organization.
Capability Economic Value of Intangible and Tangible Assets (CEVITA)
An extension of the above alternative approaches to valuing intangibles is the CEVITA model. The original CEVITA conceptual model was developed to generate strategic financial statements aimed at enhancing the capability value (in contrast to the financial accounting value) of defense-related intangible and tangible assets (Ratnatunga, Gray, and Balachandran 2004). To calculate CEVITA, an organization needed to first prepare a strategic income statement from which capability assets could be valued. A variant of this income statement (in a commercial setting) is illustrated in Figure 1. Here, consensus measures and other key performance indicators (KPIs) are used as economic levers to convert costs to capability values. These measures are recognized as the many Expense Leveraged Value Indexes (ELVI [TM]) found in organizations. The ELVI measure will be explained in detail in a later section of this paper.
[FIGURE 1 OMITTED]
The CEVITA valuation approach recognizes that an asset may be a factory, a warehouse, a sales booth, or a retail outlet. Or it could be a Web site or Internet-based channel exhibiting impressive traffic and/or sales. It could be a patent, a training program, a logo, a slogan, or an advertising campaign. Therefore, to develop strategic value statements, one has to first recognize what the capability-based tangible and intangible assets are (some of which are more easily identifiable than others). Some of the more identifiable (but still troublesome) key intangibles found in most organizations are summarized below.
The first category of intangibles is comprised of human capital and customers. Most of the more recent performancemeasurement systems include measures of customer and employee acquisition and retention, life cycle, and turnover. The challenge is to show how these nonfinancial measures can be translated into financial measures that could be relevant to the economic value of the brand in terms of its capabilities. A strong brand can give a company benefits such as greater customer loyalty, less vulnerability to competitive marketing, larger margins, and decreased elasticity in customer response to price increases. Human capital and customer expenses need to be leveraged to ascertain the asset value being created. R&D, marketing research, intellectual property, and patents are some of the other relevant intangibles. Most marketing expenditure occurs in this area, with the specific objective of either obtaining an immediate sale, or enabling a potential future sale by enhancing the brand's capability value or equity. Some R&D is basic research that may be highly risky but that could provide the basis for substantial long-term growth. Other forms, such as software development, are aimed at developing products with a short life span. This product development type of R&D differs from research designed to make production/logistics/supply chain processes more efficient. Financial accounting regulators often take the view that such R&D spending (like most marketing spending) should not be recorded as an asset but treated as a single-period expense. However, such expenditure could be leveraged to provide a capability in future periods (i.e., a capability economic asset). Similarly, patents are becoming a focus for intellectual-capital management within many organizations. Of course, the existence of patents increases the capability of the organization and must therefore form part of the overall CEVITA measure.
At this point, it is important to define and contrast brand equity components. Brand equity is the asset, that is, "what one has," much like a Ferrari F1 racing car (tangible asset) or Michael Schumacher's driving skills (intangible asset). Brand capability is what can be achieved (or "what one can do") when these asset categories are combined in a contextual situation, that is, winning the World Championship. Brand capability value (BCV) is the economic value of the capability (i.e., the current and future monetary value to Ferrari in winning the Formula One World Championship).
Extending the CEVITA Model
In this section, we explore the possibility of extending the CEVITA model to the valuation of commercial capabilities, specifically, to those that accrue from marketing activities. Before doing so, however, two questions arise. First, is there a need for such a model in a commercial context? Second, is a model developed specifically for the valuation of defense capabilities valid in other contexts? For the reasons that follow, we believe that the answers to both questions is yes.
With regard to the first question, Keller (2003), along with many others, has made the observation that business owners want to do more than just report historical financial transactions. They are looking for advice that will help them better manage their business and better measure their performance against additional, nonfinancial criteria and standards, in order to to show a more complete picture of their value. Keller (2003) states that the current transactions-based financial reporting model is too focused on things that have already happened (and therefore cannot be changed) and ignores the future events that a company can work toward to create future value. In recent times, an ever-increasing number of organizations and commentators have challenged the current financial accounting-based valuation model. For example, PricewaterhouseCoopers (2002) reports that top executives at multinational companies consider nonfinancial performance measures, such as development of brand equity, product and service quality, and customer satisfaction and loyalty, to be more important than current financial results in creating long-term shareholder value.
Regarding the second question concerning the validity of extending the model, Ratnatunga, Gray, and Balachandran (2004) state that some of the theories used as the starting point of the DOD valuation approach for defense capabilities originated from the commercial world; therefore, such an extension (or reversion) back to the commercial arena could be considered more evolutionary than revolutionary. In fact, many valuation measures that were considered to be of limited use for defense capabilities can be (and are) more applicable in the commercial environment. (2)
Brand Capability Value
We have already discussed that it is the highly contextdependent combinations of tangible and intangible assets that make up an organization's capability, and that often it is the marketing activities that provide the base of the contextual capability combinations that competitors find difficult to imitate. Such organizations strive to leverage their IMC expenditures to create capability-related market values, especially in terms of their brand(s). This suggests that there is a strong and demonstrable link between what an organization spends in a particular period on marketing and how such expenditure can increase (or if the spend is inadequate, decrease) brand value. Therefore, we contend that the approach taken by Ratnatunga, Gray, and Balachandran (2004), where asset values are calculated via a single-period valuation process using ELVI (similar to the revaluation of a noncurrent asset in traditional financial accounting), is suitable for commercial applications for organizations seeking to value their strategic communication capabilities.
The relationship of the ELVI to the market consensus value is demonstrated using the following equation: (3)
dS/dt = r.E. (M - S/M) - [delta]S
The equation indicates that the change in the economic value (dS/dt) of a capability-enhancing asset at time t is a function of five factors: (4)
E: the costs/expenses incurred to support the capability;
r: the value-increasing constant (ELVI No. 1, defined as the value generated per expense dollar when S = 0);
M: the maximum consensus value of the capability;
S: the current value of the capability; and
[delta]: the value-decay constant (ELVI No. 2, defined as the fraction of value lost per time unit when E = 0).
The equation states that the change (increase) in the capability value will be higher when r, E, and the untapped capability potential are higher, and the value-decay constant is lower.
Although investments in knowledge/learning/communication/training have been used as an indicator to value organizational capabilities, in much the same way as R&D activities are, some further caution is required in using the ELVI indexes and the resultant CEVITA measure. The DOD research study5 indicated that organizations generally focus on five main components of intangible capability-enhancing assets, that is, innovation assets, human resource assets, brand image assets, external relationship assets, and internal infrastructure assets. These are the strategic capability-enhancing assets, which allow an organization to perform. These include unique technological assets such as software or code, unique process core competencies, and unique physical assets such as specialized or well-located plants or retailers. Such organizations leverage these assets to create capability-related market values. Although some of these assets can be related to cash flow generation, many subcategories cannot fully be captured on a cash basis, but still provide value leverage to an organization. Examples of these include:
Leveraging Captive Attention-Based Assets
Property managers, sales managers, and Web site developers have realized there is inherent, unrealized value in the people trafficking through their building lobbies, elevators, and Web pages every day. Often this traffic is "captive" and can be converted to end users with a little visual, auditory, and other cognitive attention-generating methods.
Leveraging Unique Information Assets
Credit card agencies collect unique information assets on credit card holder spending patterns; Internet-service providers collect unique information on the Web-browsing habits of their clients; POS (point-of-sale) scanners provide real-time feedback on the impact of promotions on sales. Such information is a prized asset, particularly given the critically important role of the database in successful IMC.
Leveraging Trust-Based Relationship Assets
Many firms have found that trust-based relationships can be leveraged into previously untapped cross-selling and up-selling opportunities. Even celebrities endorsing certain products are visible manifestations of this trust, but the concept has been extended to one trusted commercial group endorsing another. Thus, professional bodies, at special rates, are now issuing credit cards for members, thus providing additional member services for the professional body and new cardholders for the credit card company. The following types of "trust-based" relationships can be leveraged into valuable assets: unique partners and alliances, key vendor relationships, unique competitor relationships, unique government relationships, key customer/buyers, financier links, special employee/union relationships.
Leveraging Management and Board Experience
Companies, via their management and boards of directors, often enjoy extensive industry relationships, access to capital, and other advantages. The right combination of experience is an asset, creating the foundation for successful execution of a strategy, and sometimes those competitive advantages are gained through innovative partnerships and alliances. In other cases, it can even be the lack of certain barriers to success that is most valuable. The following are some examples of such experience-based assets: industry relationships, union relationships, special reputation, strong leadership, strong teamwork, good managerial "reserves," access to quality interim personnel, access to personnel for peaks and troughs workflow management, good employee knowledge or other special characteristics, strong recruiting capabilities.
Leveraging Unique Organizational Assets
There is a whole host of organizational assets that are recognizable as intangible, but do not neatly fit into the more conventional intangible assets mold. These arise due to the unique technological, physical, and financial processes found in some organizations. Some examples are unique technological assets (domain names, unique software or code, hardware infrastructure); unique process assets (core competencies, distribution or channel power, economies of scale); unique physical assets (specialized or well-located showrooms or warehouses, specialized or well-located equipment); and unique financing assets (ease of access to equity/venture capital or cheap debt).
These asset categories are listed in Figure 2 as the investment side of a strategic balance sheet. Furthermore, for the balance sheet to balance, the financing that was used to create such assets also needs to be shown as a reserve account. This is no different from the way tangible asset revaluations are treated in the financial accounts of organizations. (6)
APPLYING THE CEVITA MODEL TO MARKETING COMMUNICATION
Within reason, the more logistical and financial support is invested in a marketing channel (say a Web site), the more capable it becomes. The difficulty, however, lies in estimating the relationship between the cost and the resultant capability enhancement. As a hypothetical example, assume that an organization is considering setting up a Web-based communication and delivery channel for on-line promotion, customization, and order entry for its products (i.e., similar to the Dell business model). The two fundamental objectives of this Web site would be related to the development of external relationships required for "order generating" (brand building and sales) and "order processing" (distribution). Due to the economics of diminishing returns, however, such external relationship assets, like all economic assets, would have a maximum capability potential, no matter how many financial and other resources were lavished on it. Let us assume that this marketing channel has a maximum (consensus-based) capability potential of (say) $25,000,000. Let us also assume that it has had 10 years of support from the organization, and its current capability value is estimated as $15,000,000, based on the financial, logistical, and facility costs expended on it.
Let us now assume that the organization, based on its past experience, estimates the value-increasing constant (r) to be 6 if such support is continued, and the value-decay constant ([delta]) to be .02 if such incremental support is withdrawn. If the organization in year 11 expends $160,000 (E) to support the communications capability of the Web-based channel via installing customer relationship management (CRM) software, the capability value of the channel will, using the equation presented earlier, be enhanced as follows:
(dS/dT)=6.160,000.(25,000,000-15.000,000/15,000,000)-.02(15,000,000)
(dS/dT)=6(.67).160,000-300,000=$340,000
Thus, based on these ELVI, by spending only $160,000 on capability support, the capability value has been leveraged up by a significant $340,000, or a net ELVI of 2.125. If the objective of the organization is merely to maintain the capability level of its distribution channel, then dS/dt can be set to zero, and thus the equation becomes:
0=6(.67)E-.02(15,000,000)
3000,000=6(.67)E
300,000/4=E=approximately $75,000
This concept is no different from the expenses a company would need to spend on repairs and preventive maintenance of its tangible assets (e.g., delivery vehicles). Just to keep the vehicles running at its current level of economic capability, a certain level of expenses would need to be incurred.
Note that if the organization in the preceding example spends only $50,000 on capability support, by applying the capability-enhancing asset equation, the change in economic value (dS/ dt) works out to be a negative $99,000, or a net ELVI of minus 1.98. Thus, all organizations would have a range of net ELVI, some greater than 1, some between 0 and 1, and some negative. Hence, the model is not biased only in the positive (capability-enhancing) direction, nor are the resultant values linear to the amount of expenditure. That is, inputs to the model will not always produce a positive result, as a campaign that is not funded at the proper level may result in a weakened market position for the brand, due to the (poor) creative/ design or (poor) execution/media strategy of that effort. (7)
This range of positive and negative capability-leveraging expenses is illustrated in Figure 1. Note also that as the negative net ELVI values reduce capability asset values, this is conceptually very similar to the depreciation/amortization of assets under traditional financial reporting, whereas the positive net ELVI-related values are similar to the revaluation of asset values under traditional financial reporting.
We strongly believe that such an approach provides an important strategic tool in planning for the organization, as it now is able to determine what expense levels must be included for the maintenance of that particular capability at a zero-base (see Figure 2). Similarly, in terms of brand management, an organization would need to expend a minimum level of money to keep the brand visible in the eyes of customers, depending on the quality of the creative, the target audience, the level of competition (i.e., share of voice), and the life stage of the brand. For example, in the frequently purchased package goods market, this minimum level of marketing expenditure has traditionally been very high due to low customer involvement, frequent brand switching, and low technical entry barriers. Thus, value-decay constant ([delta]) of most brands in this sector is high.
Additional factors can be embedded in our model in a number of long-run value equations and used to estimate the capability-value consequences of alternative expense-budgeting strategies. For instance, an asset value can be given as a function of
* the percentage of repeat-purchase customers and the rate of churn;
* the percentage of customers not committed to the firm or its main competitor;
* the size and rate of growth of the total market;
* the relative influence of product characteristics, price, personal selling, sales promotion, and distribution as influences of capability value; and
* the relative influence of the "interaction" of product characteristics and advertising as an influence on capability value. (8)
These measures would differ by industry. The aim would be to set industry-specific standards for reporting robust, nonfinancial information on asset capability (especially intangibles) that could be independently audited. In high-tech industries, with heavy investment in research and development, fair market values for related R&D might be highly relevant. In others, such as fast-moving consumer goods, estimates of brand value would be more relevant.
It would be a mistake to aim for global standards because measures relevant to large mature brands would not necessarily apply to smaller, emerging brands. Instead, the aim should be to develop measures tailored to particular industries, which could be adjusted to take into account a company's stage of development. Figure 1 provides a simple illustration of how various capability-maintaining and capability-enhancing expenses are leveraged using specific ELVI to obtain asset values.
Where relevant, the already established "traditional" and "new" valuation approaches discussed earlier should be used and incorporated into the overall CEVITA valuation. However, in situations where, for whatever reason (theoretical or practical), any one of the above measures cannot be used, then the consensus-based ELVI measure should be used. Thus, the ELVI will often be the measure of last resort.
EXTENDING THE MODEL TO INCORPORATE THE EFFECT OF MARKETING COMMUNICATION ON BRAND VALUE AND SALES
As user-friendly as the approach is, the interdependent nature of IMC could make the application of the univariate CEVITA model somewhat restrictive. While it can be argued that all assets need to be integrated to provide a competitive capability to an organization, IMC, by its very nature, has as its objective an integrated approach to the marketplace. Thus, for the CEVITA model to provide useful information for budgeting and performance-reporting purposes, it needs to be extended in a multivariate manner to deal with the complex IMC interrelationships. We therefore consider IMC tools (see Figure 3) to be the preconditions (or antecedents) required for the inducement of sales (which are the consequences). These antecedents act via an intermediate variable, such as brand recognition.
Based on the preceding literature on the conventional wisdom regarding IMC, and the model presented above, it can be posited that IMC can potentially have both an attitudinal effect on the brand and a behavioral effect on sales. Thus, the many ELVI values that constitute IMC effort in an organization first need to be combined to provide brand capability value, as follows:
(dS/dt)=[N.summation over i][([r.sub.i] x [E.sub.i] x (M-S/M) - [[delta].sub.i] S) [P.sub.i]]
The equation indicates that the change in the economic brand value (dS/dt) of a capability-enhancing IMC campaign at time t is a function of seven factors, (9) namely:
[E.sub.i]: the costs/expenses incurred to support the capability of the [i.sup.th] IMC variable;
[r.sub.i]: the value-increasing ELVI constant of the [i.sup.th] IMC variable (defined as the value generated per expense dollar when
S = 0);
M: the maximum consensus value of the brand capability;
S: the current value of the brand capability; [[delta].sub.i]: the value-decay ELVI constant of the [i.sup.th] IMC variable (defined as the fraction of value lost per time unit when E = 0); and
[p.sub.i]: the proportion of funds expended on the [i.sup.th] IMC variable, where N = the total number of IMC variables, and where:
[N.summation over i] [p.sub.1] = 1
This model uses a multivariate approach to capability asset valuation, and we have termed this the Brand Capability Value of Integrated Marketing Communication (BCV[TM]), which forms one of the components of the overall CEVITA of an organization. The extension of the univariate CEVITA model to incorporate IMC processes requires the derivation of the [p.sub.i] measure for each IMC task. This will initially also have to be a consensus measure, until experience in using the model is developed. One approach to obtaining such [p.sub.i] values initially is to ask those carrying out the above performance appraisals to first break up the selling process into six separate selling tasks and estimate a percentage for each task indicating the relative weight of the task toward the total selling process. Next, they could be asked to indicate the contribution of brand equity (i.e., brand recognition) using a "scale" of some sort (e.g., rates, weights, percentages) for each selling task. (10) Such an evaluation is obviously based on subjective estimates, and therefore, the results obtained are a "subjective-squared" figure. Such a figure is not an end in itself, however, but a structuring of the complex process of thought upon which the various managers will be basing their decisions. Thus, the figures arrived at must be considered as one of the inputs in the difficult field of planning-communications strategies and measurement of their effectiveness. Note that the selling tasks and their relative weights will differ from industry to industry. The techniques outlined above could be used before the actual sales process begins to enable more objective setting of percentages. These numbers (for a hypothetical case) are provided in Table 1.
At the end of an actual sales period, the behavioral techniques could be used again, along with the experience gained during the period, to attach new weights to the selling task and new percentages to advertising's contribution toward that task. (11) Deviations could be analyzed, and the more this method is used, the better both the accounting and marketing functions will understand the true nature of the contribution of brand capability to the total sales effort. As more knowledge of this relationship is obtained, performance standards can be set, so that an investigation can be initiated if the actual observations are not in line with model expectations.
The estimates provided in Table 1 indicate that the brand capability contribution to the overall sales target is 54%. Thus, assuming the organization's initial brand capability value is $10 million, then its potential sales revenue is $18.5 million (keeping other non-IMC sales-related variables constant). (12) This number will be the starting point for a sales revenue forecast.
Let us now assume that the marketing director is considering the components (or antecedents, see Figure 3) required to maintain or increase this brand capability value (and thus generate more sales revenue), and has estimated a mix of IMC-related variables as per Iteration 1 in Table 2.
To continue our hypothetical example further, let us also assume that the various ELVI values have been obtained for each of the IMC variables in terms of its contribution to brand recognition, and that the multivariate model equation is being used. We can see in Table 3 that if the maximum brand capability value (M) is set using the consensus approach at $20 million, and the current brand capability value (S) is initially $10 million (as stated in Table 1), and if, say, $500,000 is expended on IMC activities for the period, then the brand capability value based on the proportion of funds expended on each IMC variable is a negative $568,750.
Table 3 thus indicates that half a million is inadequate to sustain the capability value of the brand, and as a consequence, the sales tasks as per Table 1 will be made much harder, reducing the sales forecast to $17.5 million as follows:
Initial brand capability value $10,000,000 Less: Brand capability incremental value ($568,750) Net brand capability $9,431,250 Sales forecast 54% $17,465,277
Therefore, if the organization wishes to maintain the same BCV[TM], then the model equation will indicate (using the goal-seek function in Excel) that $718,540 will need to be expended, to maintain the brand capability at its initial value. This would be the zero-based level of expenditure on IMC for brand capability maintenance. This is shown in Table 4. As one can see, such a model will be extremely useful in helping resolve recurring budgeting problems in marketing generally (Piercy 1986) and IMC specifically (Ewing, de Bussy, and Caruana 2000), namely, that of allocating expenditure between competing IMC variables.
One can see from Table 4 that even this revised expenditure level is still inadequate to maintain some individual IMC variable values (e.g., advertising). Thus, the goal-seek function can be utilized again to ascertain the minimum expenditure required to maintain the level of advertising capability. This works out to approximately $830,000, and the result is shown in Table 5.
Of course, as this expenditure level also increases the spend on the other IMC variables (see Iteration 1 in Table 2), the net capability value of the brand, and hence the sales forecast, also increase as follows:
Initial brand capability value $10,000,000 Add: Brand capability incremental value $298,750 Net brand capability $10,298,750 Sales forecast 54% $19,071,759
The IMC model can also be used to increase brand capability by expending different proportions of funds on the individual variables. Using the Iteration 2 column from Table 2, keeping the total spend at $830,000, the brand capability value increases to $313,500 (see Table 6). Using the Iteration 3 column, brand capability value increases to $352,500. This is because the different ELVI values of the IMC variables impact the capability values differently.
CONCLUSIONS
While there are many new measurement systems using measures of human capital, customer relationships, and brand values, these approaches are plagued by variously restrictive limitations. Many of these new systems appear elegant but would require large investments in data collection. Many measure "assets" that have no obvious bearing on strategic values. In contrast, the CEVITA measure, presented via strategic financial statements, provides a useful and practical way to visualize and value the intangible capability assets of an organization.
This measure, which uses a number of Expense Leveraged Value Indexes (ELVI), also overlaps with new performance-measurement systems such as the balanced scorecard, especially in the leveraging of expenses to derive capability-enhancing asset values. One such value is the capability value of brands. This paper demonstrates how Brand Capability Values (BCVTM) can be derived for budgeting and valuation purposes using a multivariate model incorporating all of the IMC variables that are the preconditions (or antecedents) required for brand capability enhancement.
Note, however, that we are not suggesting that our approach is complete; rather, it is a work in progress. We believe it has both the theoretical and methodological rigor to serve as a useful point of departure for enlightened organizations to customize, implement, and refine. Of course, IMC is a process, not a program (Schultz 1994), and the challenge is not only to measure value, but also to manage it (Neckermann 2004). Our approach should allow firms to do both. As Jones (2005) points out, however, marketing communication is highly context-specific; this is something that we believe we have been able to capture in our model. Yet for our assertion to be verified, the brand capability model needs to be implemented and adapted in different organizations and industries.
As Shoebridge (2004) taunts, it is now time for marketers to stop complaining and start quantifying. We hope we have provided IMC practitioners with a tool to manage the process more efficiently and profitably. Finally, it is perhaps worth reflecting on what we perceive to be the paper's five most salient contributions:
1. While "measuring marketing ROI" is unquestionably a "hot topic" at the moment and the subject of frenetic scholarly activity, the harsh reality remains that until marketers can master the lingua franca of the boardroom (i.e., finance), the function will remain marginalized. Ambler's (2000) research reveals the startling fact that boards devote nine times more attention to spending and counting cash flow than to wondering where it comes from and how it could be increased. Similarly, Jones (2005) observes that advertising has fallen off top management's agenda and that brand management is being relegated to relative juniors in many organizations. It is our hope that our approach can help empower marketers by allowing them to present both budgeting and evaluative processes within a cogent financial framework, thereby giving marketing more legitimacy and credibility in the boardroom.
2. Until fairly recently, advertising's defensive or brand maintenance role has been overlooked (at least, outside of the United Kingdom, where the Ehrenbergian/weak theory doctrine is most widely accepted). In mature markets, maintaining market share is arguably the most important priority for (most) established brands today. We provide a method to justify defensive marketing communications expenditure (i.e., where customer retention is more of a priority than customer acquisition). Such an approach has hitherto been lacking, leaving many brand managers feeling compelled to strive for totally unrealistic growth strategies, causing them to then (predictably) "fail" and face further budget cuts. To address this, we offer a sophisticated "bottom-up," objective-and-task method for budget setting. Despite the rhetoric, many firms today still use archaic "top-down" approaches (e.g., percentage-of-sales or share-of-market/share-of-voice), which severely restrict growth and/or "punish" maintenance.
3. Former Journal of Advertising editor George Zinkhan recently noted that marketing and finance professors live in two different worlds, seldom interacting, and even constructing artificial barriers between one another (Zinkhan and Verbrugge 2000). This paper is a tangible example of what can be achieved when the two disciplines put aside their differences and work to achieve a true research synergy, one that we hope advances theory in both disciplines, and finds application among practitioners at the coalface.
4. As Ambler (2000) points out, many marketers remain confused as to the difference between brand equity (an asset) and brand value (a financial metric). This paper provides a link between the two via a new construct called brand capability (i.e., what one can actually achieve with the asset). It also outlines the potential role of IMC in enhancing brand equity.
5. Finally, we have substantially extended Ramatunga, Gray, and Balanchandran's (2004) univariate valuation model (applied to the Australian Department of Defence) by constructing a multivariate model with widespread commercial applicability.
APPENDIX
Glossary
accounting equation: The fundamental mathematical equation upon which all accounting information is based: Assets - Liabilities = Owner's Equity (A - L = E).
accounting-period convention: This convention assumes that the indefinite life cycle of the firm can be subdivided into periods of equal length (usually 12 months), so as to establish fixed reporting intervals.
accrual accounting: The recording and reporting of all transactions affecting a firm in a specified period, both of a cash and noncash nature.
asset: An item of economic value that is owned by the business and is expected to contribute to the future revenue-earning capability of the business.
balance sheet: A detailed listing of the entity's assets, liabilities, and owner's equity accounts. It is designed to illustrate the financial position of the firm at a given point in time, and is usually provided at the end of the month or year. Also referred to as a statement of financial position.
cash flow from operations: Cash flows arising from an entity's provision of goods and services.
cash flows: These are cash movements during a reporting period resulting from transactions with parties external to the entity.
current assets: Asset values that vary in a single accounting period, such as the value of inventory, accounts receivable, and cash.
DCF: Discounted cash flow, or future cash flows restated in current money value terms, using the cost of capital as a discount rate.
equity: The interest, or claim, of the shareholders of the entity against the net assets of the business. Equivalent to total assets less total liabilities.
expense: Money spent to earn income in the current period.
financial statements: Financial reports, including the profit and loss account, balance sheet, and cash flow statement, which are produced by the firm on a regular basis, and are useful for decision making and resource-allocation purposes.
income: Revenue of the business that is earned through the sale of goods or the performance of services; also referred to as revenue.
income projection valuation: Estimation of the current income-generating capacity of an asset.
income statement: See profit and loss account.
intangible assets: Assets one cannot physically touch.
investment: Money spent on the purchase of assets.
market valuation: The current market price of an asset.
matching principle: The principle that revenue and expense items pertaining to a particular period must be properly recognized and compared to obtain the correct profit (or loss) for the period.
net assets: Total assets less total liabilities. Equivalent to owners' equity.
noncurrent asset: Long-term assets, also known as fixed assets.
profit and loss account: A financial statement that illustrates the trading activities of the firm during the specified period. Items are classified as revenue less expenses, to obtain the net profit or loss. Also referred to as income statement, revenue statement, or profit and loss statement. This is a statement of financial performance.
replacement costs: Money that will have to be spent to replace an asset to its current income-generating ability.
reserves: Profits that have been retained within a company for specific purposes, such as capital reserves (reserves that are not available for distribution) or revenue reserves (reserves that are distributable to the shareholders).
tangible asset: Assets that one can physically touch, such as the plant and machinery.
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NOTES
(1.) We define an asset as a cost incurred that has a "future economic benefit." Current financial accounting reporting standards do not recognize some of these costs as assets (e.g., advertising costs), many of which are considered as having only single-period economic benefits, and thus are expensed in financial accounting reports. However, Ramatunga, Gray, and Balachandran (2004) argue that such costs enhance the strategic capability of an organization and should therefore be considered as capability assets for future-oriented decision making.
(2.) Cash flow measures and market-based measures were not considered relevant for military capability valuation, as assets in such contexts were not expected to generate income.
(3.) The theoretical underpinning of this model was derived from the Vidale-Wolfe (1957) model employed to describe the sales response to advertising efforts.
(4.) Over time, and with experience, these coefficient values should reflect the value-expense relationships that exist in most spending decisions, but remain largely unquantified. The ELVI essentially attempts to quantify the "qualitative" aspects of the cost-benefit approach.
(5.) The DOD obtained these intangible asset categories from numerous research studies (see Barsky and Marchant 2000; Leadbeater 2000; Litman 2000; and Ramatunga 2002).
(6.) For a full discussion of the double-entry procedure suggested to record asset capabilities and associated financing costs, see Ramatunga, Gray, and Balachandran (2004).
(7.) We thank the guest editors for pointing this out.
(8.) This paper provides a conceptual model of generating capability values in the context of the interaction effects of marketing communications variables. Extensions of this model can, theoretically, be applied to the interaction effects of all of the marketing mix variables.
(9.) Over time, and with experience, these coefficient values should reflect the value-expense relationships that exist in most spending decisions, but remain largely unquantified. The ELVI essentially attempts to quantify the "qualitative" aspects of the cost-benefit approach.
(10.) For example, the salespersons may say that 70% of the task of making contact with a customer was made easier because the brand was well known.
(11.) Here, the salespersons are being asked to determine the extent of effectiveness of each IMC variable on the enhancement of the brand's capability value at the end of the period, that is, the ex post percentages (actuals). This will be in the feedback stages of model application, and would help in the replanning for the next period.
(12.) For simplicity, no distinction has been made between the current sales and future sales in this sales forecast.
Janek Ratnatunga (Ph.D., Bradford) is a professor in the Department of Accounting and Finance, Monash University, Australia.
Michael T. Ewing (DCom, Pretoria) is a professor of marketing in the Faculty of Business and Economics, Monash University, Australia.
FIGURE 1
The Strategic Income Statement
Brand Brand
A B Nonbrand
CAPABILITY PROVIDING INCOME
Revenue from products $500,000 $800,000 $50,000
Revenue from services
Royalties
Licences and related sales
Other income (e.g., advertising
banner fees)
$500,000 $800,000 $50,000
CAPABILITY PROVIDING EXPENDITURE
Material costs ($15,000) ($12,000) ($8,000)
(assigned directly)
Resource costs (assigned via activity-based costing)
People resources
Labor (including unions) ($4,000) ($3,000) ($2,000)
Management
Knowledge workers
($4,000) ($3,000) ($2,000)
Organizational process resources
PPE (depreciation) ($2,000) ($1,000) ($1,000)
Overhead (rent, rates, etc.)
($2,000) ($1,000) ($1,000)
Marketing resources
Brands ($3,000) ($5,000)
Customers
Markets
Promotions
Channels ($500) ($1,500)
Alliances
Networks
($3,500) ($6,500) $0
Innovation resources
R&D (life cycle-based) ($20,000) ($45,000) ($1,000)
Intellectual property
($20,000) ($45,000) ($1,000)
Financial resources
Lease costs
Interest expenses
$0 $0 $0
Total expenses
Net profit before tax
Tax expenses (@40%)
NPAT
Dividend expenses
Retained earnings
Net increase in CEVITA
Net
Segment TOTAL ELVI
CAPABILITY PROVIDING INCOME
Revenue from products $1,350,000
Revenue from services $25,000 $25,000
Royalties $10,000 $10,000
Licences and related sales $5,000 $5,000
Other income (e.g., advertising
banner fees) $1,000
$41,000 $1,391,000
CAPABILITY PROVIDING EXPENDITURE
Material costs ($10,000) ($45,000)
(assigned directly) ($10,000)
Resource costs (assigned via activity-based costing)
People resources
Labor (including unions) ($12,000) ($21,000) .40
Management ($50,000) ($50,000) -10.00
Knowledge workers ($600,000) ($600,000) 2.40
($662,000)
Organizational process resources
PPE (depreciation) ($25,000) ($29,000)
Overhead (rent, rates, etc.) ($30,000) ($30,000)
($55,000)
Marketing resources
Brands ($4,000) ($12,000) .80
Customers ($2,000) ($2,000) -6.00
Markets ($3,000) ($3,000) -12.00
Promotions ($6,000) ($6,000) -3.40
Channels ($2,000) ($4,000) -.50
Alliances ($3,000) ($3,000) -6.00
Networks ($1,000) ($1,000) -5.00
($21,000)
Innovation resources
R&D (life cycle-based) ($100,000) ($166,000) 4.30
Intellectual property ($50,000) ($50,000) .60
($150,000)
Financial resources
Lease costs ($40,000) ($40,000) .70
Interest expenses ($10,000) ($10,000)
($50,000)
Total expenses ($1,072,000)
Net profit before tax $319,000
Tax expenses (@40%) ($127,600)
NPAT $191,400
Dividend expenses ($50,000)
Retained earnings $141,400
Net increase in CEVITA
Capability
asset value
CAPABILITY PROVIDING INCOME
Revenue from products
Revenue from services
Royalties
Licences and related sales
Other income (e.g., advertising
banner fees)
CAPABILITY PROVIDING EXPENDITURE
Material costs
(assigned directly)
Resource costs (assigned via activity-based costing)
People resources
Labor (including unions) $8,400
Management ($500,000)
Knowledge workers $1,440,000
Organizational process resources
PPE (depreciation)
Overhead (rent, rates, etc.)
Marketing resources
Brands $9,600
Customers ($12,000)
Markets ($36,000)
Promotions $20,400
Channels ($2,000)
Alliances ($18,000)
Networks ($5,000)
Innovation resources
R&D (life cycle-based) $713,800
Intellectual property $30,000
Financial resources
Lease costs $28,000
Interest expenses
Total expenses
Net profit before tax
Tax expenses (@40%)
NPAT
Dividend expenses
Retained earnings
Net increase in CEVITA $1,677,200
Note: ELVI = Expense Leveraged Value Indexes; PPE = property, plant,
and equipment; NPAT = net profit after tax; CEVITA = capability
economic value of intangible and tangible assets.
TABLE 1
Projected Contribution of Advertising to Sales
%
contribution
to selling
% weight of task due to
task in the brand
sales process recognition
Selling task Estimate Actual Est. Act.
Making contact 10% 70%
Arousing interest 15% 80%
Creating preference 25% 60%
Making specific proposals 15% 0
Closing orders 10% 0
Keeping brand wanted 25% 80%
100%
Sales forecast $18,518,519
Brand contribution to sales $10,000,000(54%)
Total
contribution
of brand
recognition
Selling task Est. Act.
Making contact 7%
Arousing interest 12%
Creating preference 15%
Making specific proposals 0
Closing orders 0
Keeping brand wanted 20%
54%
Sales forecast
Brand contribution to sales
TABLE 2
Contribution of Integrated Marketing Communication (IMC) Variables to
Brand Recognition
Iteration 1 Iteration 2
IMC variable Estimate Actual Estimate Actual
Advertising 60% 50%
Direct marketing 15% 20%
Public relations 5% 15%
Sponsorship 5% 5%
Promotions 10% 5%
World Wide Web 5% 5%
100% 100%
Iteration 3
IMC variable Estimate Actual
Advertising 45%
Direct marketing 26%
Public relations 15%
Sponsorship 5%
Promotions 5%
World Wide Web 4%
100%
TABLE 3
Brand Capability Incremental Value
Value- Value-
increasing decaying
IMC variable ELVI[TM] constant ELVI[TM] constant
Advertising 4.8 .2
Direct marketing 6.5 .2
Public relations 3.5 .1
Sponsorship 2 .01
Promotions 10 .3
World Wide Web 1.5 .03
Brand capability incremental
value
IMC (integrated
marketing
communication)
variable
Percentage of contribution
costs expended to BCV (brand
IMC variable (Iteration 1) capability value)
Advertising 60% ($480,000)
Direct marketing 15% ($56,250)
Public relations 5% ($6,250)
Sponsorship 5% ($20,000)
Promotions 10% ($50,000)
World Wide Web 5% ($3,750)
Brand capability incremental
value ($568,750)
TABLE 4
Brand Capability Maintenance Value
Value- Value-
increasing decaying
IMC variable ELVI[TM] constant ELVI[TM] constant
Advertising 4.8 .2
Direct marketing 6.5 .2
Public relations 3.5 .1
Sponsorship 2 .01
Promotions 10 .3
World Wide Web 1.5 .03
Brand capability incremental
value
IMC (integrated
marketing
communication)
variable
Percentage of contribution
costs expended to BCV (brand
IMC variable (Iteration 1) capability value)
Advertising 60% ($165,303)
Direct marketing 15% $50,288
Public relations 5% $12,872
Sponsorship 5% $30,927
Promotions 10% $59,270
World Wide Web 5% $11,945
Brand capability incremental
value $0
TABLE 5
Advertising Capability Maintenance Value
Value- Value-
increasing decaying
IMC variable ELVI[TM] constant ELVI[TM] constant
Avertising 4.8 .2
Direct marketing 6.5 .2
Public relations 3.5 .1
Sponsorship 2 .01
Promotions 10 .3
World Wide Web 1.5 .03
Brand capability incremental
value
IMC (integrated
marketing
communication
variable
Percentage of contribution
costs expended to BCV (brand
IMC variable (Iteration 1) capability value)
Avertising 60% $0
Direct marketing 15% $106,250
Public relations 5% $22,917
Sponsorship 5% $36,667
Promotions 10% $116,667
World Wide Web 5% $16,250
Brand capability incremental
value $298,750
TABLE 6
Brand Capability Growth Sensitivity Analysis
Value- Value-
increasing decaying
IMC variable ELVI[TM] constant ELVI[TM] constant
Advertising 4.8 .2
Direct marketing 6.5 .2
Public relations 3.5 .1
Sponsorship 2 .01
Promotions 10 .3
World Wide Web 1.5 .03
Brand capability incremental
value
IMC (integrated
marketing
communication)
variable
Percentage of contribution
costs expended to BCV (brand
IMC variable (Iteration 2) capability value)
Advertising 50% $(4,000)
Direct marketing 20% $139,500
Public relations 15% $67,875
Sponsorship 5% $36,500
Promotions 5% $57,500
World Wide Web 5% $16,125
Brand capability incremental
value $313,500
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