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Here Jamie Diaferia and Benjamin Thiele-Long of Infinite Global provide Finance Monthly with expert insight on the growing needs of branding and why the right balance of considerations will allow your business’ brand to thrive among the competition.

Last month, Brand Finance published its Global 500 report which saw Lego regain its position as the world’s most powerful brand. But while it’s hard to refute that the ultimate and overriding purpose of building a powerful brand is to make money -- after all the business of business is business -- it raises the question: Why do some brands fare better than others in establishing their brand strength in the market?

Whatever sector a company works in it needs a unique reason to exist, something to set itself apart from competitors. The skill is in how it communicates this reason, and history has given us examples of brands that have failed and those that have succeeded against the odds. When we talk about ‘brand’, we must go beyond the look and feel of the product or offering that a company provides. Instead, brand sits more with the idea of reputation and how this is leveraged to make a company successful.

Firstly, there’s a question to be asked: What is the purpose of a strong brand? For a commercial brand the starting point must always be ‘to make money’. However, when you look at companies like Google, Apple and Walmart, these are companies that are regarded as doing more than simply generating a profit -- they also attract customers, build loyalty and motivate staff.

The enduring strength of Lego’s brand is without doubt linked to both its simplicity and the breadth of its appeal which spans generations and genders, treasured by households for its ability to inspire creativity and nostalgia. What is most interesting about Brand Finance’s research, however, is that Lego scores highly on a wide variety of Brand Strength Index (BSI) measurements including; familiarity, loyalty, promotion, marketing investment, staff satisfaction, price premium and corporate reputation.

The matrix of factors that contribute to the BSI are worth exploring further, as they demonstrate that brand power is not dictated by the size of the organisation but factors such as loyalty and staff satisfaction, which are far more difficult to control and measure.

It’s also interesting to see that brand power is not unique to any particular sector. The top 10 most powerful brands according to Brand Finance’s research, all of which achieve a AAA+ rating on the BSI, spread across a range of sectors including banking, tech, media and professional services. So, it appears that brand strength relies on much more than just generating a large customer following.

Building brand power relies on leadership placing equal importance and resource on internal and external factors and audiences. Lego’s bounce back from near bankruptcy in the early 2000’s is largely attributed to the appointment of Jørgen Vig Knudstorp, a former McKinsey consultant and the first person outside the founding family to run the company when he was appointed CEO in 2004.

Knudstorp was able to stem the bleeding by selling off peripheral businesses such as theme parks and video games, and discontinuing unpopular ranges in turn ensuring that all products were compatible with the core offering both in their look and mechanical compatibility.

Rather than accrediting his revised strategy for Lego’s return to form, Knudstorp attributes the company’s ongoing success to its employees and customers. When asked about turning Lego around, he points out that employee engagement serves as the foundation of the company’s reward system, while customer loyalty gives Lego the chance to serve multiple generations of family members. Prior to the turnaround, Knudstorp noted that Lego had taken this loyalty for granted by stretching the brand too thin. Instead, he wanted Lego to be an irreplaceable but also irresistible brand for children.

The balance, achieved perfectly within Lego, was in rewarding financial value creation with having creative and engaged employees. In Knudstorp’s words, creating a culture where at the end of each year he could stand in front of everyone and say, “thank you for doing all of the things I never asked you to do”.

How is this done? It’s not about control where people are simply doing what they are told, because that simply creates bureaucracy. Instead, it’s about communicating to stakeholders, both internal and external, the reason for doing things, the context. Creating clarity of culture and strategic choice in turn gives clarity of purpose, i.e. Why do I want to do a good job?

Brands can spend a fortune on communicating their message and values to customers, in the hope it brings them to their doors. The value of selling a brand promise, rather than simply the product, to consumers has long been understood. Increasingly, there is equal importance in the approach of ‘internal marketing’ – communicating brand values to employees.

It’s a very simple premise: Employees, whether working for a consumer brand or a professional services company, are more likely to get fired up and remain engaged if they feel they are doing something that’s actually worthwhile. Steve Jobs, for example, was renowned for being less concerned about making a profit than ‘thinking differently’, yet Apple became the most profitable company in history.

In a recent TED talk, Simon Sinek argues that the most successful companies have products, cultures, and marketing strategies that all stem from their raison d'être. This is why companies like Apple and Tesla have grown into such powerhouse names – consumers and employees alike know exactly why the company does what it does (and in the way it does), because it helps both audiences meet the human craving for authenticity, purpose and meaning. In this same way Lego’s focus on core values and its alignment of commerce and culture enabled the toy manufacturer to put all the pieces together again.

Every year, Brand Finance, a leading brand evaluation and strategy consultancy rounds up a list of the world’s top tier brands, ranking the Global 500 in terms of power and value, and outraging media globally. Just a few weeks ago, the 2017 ranking announced a new record from Apple Inc. for brand value, Twitter as the fastest growing brand, and Lego as the most powerful, but like other, Finance Monthly wanted to know why.

Here we hear from David Haigh, CEO of Brand Finance and the face behind the Global 500 rankings, who gives us the scoop on exactly why the brick building giant is a marketing champion.

Our announcement last week that Lego is the world’s most powerful brand created quite a media stir. However, it is useful for those with a financial mind to move beyond the headlines, to understand what such a powerful brand can do for the financial performance of a business and how to emulate its success.

Brand power (also known as brand strength) is the part of our analysis most directly and easily influenced by those responsible for marketing and brand management. In order to determine the strength of a brand we have developed the Brand Strength Index (BSI). We analyse marketing investment, brand equity (the goodwill accumulated with customers, staff and other stakeholders) and finally the impact of those on business performance. Lego scores highly on a wide variety of BSI metrics such familiarity, loyalty, promotion, marketing investment, staff satisfaction, price premium and corporate reputation.

The building blocks for Lego’s brand strength have always been present. Its appeal spans generations; as well as the creative freedom it gives children, the brand taps into the nostalgia of adults. It has generally avoided gendered marketing. By appealing to boys and girls equally Lego maximises the size of its target demographic. That approach also pleases parents, as concerns mount over the effect toys may have on the outlook and ambitions of children, and girls in particular.

However, this strong foundation did not stop the firm from reaching a point of near bankruptcy in the early 2000s. An overextended product range and problems with stock control had led the company to a nadir, where both brand equity and in particular financial performance had been heavily compromised.

The downward spiral was arrested following the appointment of ex-consultant Jørgen Vig Knudstorp, who discontinued unpopular lines and ensured that all products were compatible with the core range, both visually and mechanically, helping to reverse the dilution of the brand. A clear brand architecture was established with the bright red Lego square clearly endorsing all lines. Since then a decade of repeated marketing and financial successes have transformed Lego’s fortunes.

The release of the Lego Movie in 2014 provided the final push required to make it not just a very powerful brand, but the world’s most powerful brand in 2015. The film was both a critical and commercial success (it was the top grossing film of 2014 in the UK and Ireland), providing not just immediate revenue but also an unrivalled marketing tool. The first sequel, the Lego Batman Movie will be released on February 9th. Its predicted impact has helped Lego regain its top position, lost to Disney in 2016. Further releases are planned for September 2017, March 2018 and 2019, which will continue to build the brand for years to come.

Brand strength should not be viewed in isolation however, rather the brand must be examined in the context of the business in which it operates. For that reason, as part of our analysis of brands we look at the value as well as the strength of the brand. Having calculated the BSI score, we then determine a range of possible royalty rates for brands in that industry sector by reviewing comparable licensing agreements sourced from an extensive online database. The brand strength score is applied to the royalty rate range to arrive at a specific royalty rate for the brand. For example, if the royalty rate range in a brand’s sector is 1-5% and a brand has a brand strength score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4.2%. The royalty rate is then applied to historic and forecast revenue data to determine the revenues for which the brand is responsible. Brand revenues are then discounted post tax to a net present value which to determine the brand value.

Knowing the value of a brand helps to maximise financial returns in a number of ways. Most fundamentally, it provides a true picture of the value of a business. Internally generated intangible assets are generally omitted from company accounts, which means that they are often overlooked, leaving businesses undervalued. Brand valuations can therefore help entrepreneurs to achieve a fair price for their business, rather than selling themselves short. Similarly, a comprehensive view of a brand valuation can help defend against hostile takeover. This was in fact how the very first brand valuation, back in 1988, was used. For an acquiring organisation, brand value should be a critical concern too, it can help to identify value propositions but equally, identifying a sub-par brand should be a point of due diligence. Finally, when franchising or licensing, a brand valuation is essential leverage to set the optimum price, as Lego will know from its panoply of media licensing deals.

A valuation of the transferrable brand asset therefore has key uses. However, Brand Finance also conducts detailed assessment of a brand’s overall financial value to a business, beyond the value of the asset that could be theoretically transferred. Knowing the total ‘brand contribution’ value and the drivers behind it allows you to determine where marketing focus is urgently required, where it will generate the greatest return on investment and where it should be abandoned altogether in favour of a rebrand.

Brands affect a variety of stakeholders however, not just customers. Blue-chip employers are able to pay lower wages and attract applicants in greater numbers due to their brand prestige and the endorsement effect for alumni. Strategic partnerships are easier to form, regulators are more easily persuaded and media influencers, though fickle, are more likely to cover and promote well-known, respected brands. Even hard-headed financial audiences such as investors & debt providers are influenced by the power of a brand to the financial advantage of the controlling organisation. Trust is, naturally, a hugely important consideration for lenders and so their relationship with a brand is critical.

The same applies to investors, however of even greater interest to them is recent research showing that investment in the most heavily branded organisations (those where brand value accounts for the highest proportion of enterprise value) can nearly double returns from the market as a whole.

How can the average brand hope to emulate Lego? The firm has clearly been at pains to rebuild and preserve the strength of its brand. This can be achieved with an ultra-conservative approach, one which brands such as Ferrari have employed in the past, however that leads to missed opportunities for credible brand extension that could generate huge returns. In contrast, Lego has invested heavily in research, providing a thorough understanding of what underpins brand strength, so that commercial opportunities can be pursued without compromising the brand.

In truth, it can take years to accumulate the brand equity required to create, maintain and leverage a brand of such strength. However, with so much financial value underpinned by brands, even the slightest change to strategy or marketing investment can yield (or cost) millions.

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