The reverse is also true. Companies that harvest their brands often see profits increase in the short run. A cost savings programme that damages product quality will often lead to short term profits while damaging the brand. Moving production to a low cost country will deliver cost savings and profits today, but the long term impact on the brand could well be negative. A deep price cut will often drive sales while damaging brand equity. Toyota, for example, drove enormous growth in recent years but apparently at the expense of quality and safety. This resulted in good financial results and a weaker brand.
One of the reasons brands are not reflected in stock price is that it is very hard to determine the precise value of a brand. Indeed, it is almost impossible to say what a brand is worth at any point in time. This means that it is hard to determine if a company is building its brands. Profits are very apparent. Brand health is not.
A manager looking to deliver strong short term results will rarely invest in brand building. Instead, the focus will be on short term promotions, cost reduction efforts and quick hit new products. Of course, this disconnect presents an opportunity. Savvy investors who are able to identify companies committed to brand building will be generously rewarded over time. While short term stock performance may be weak, in the long run results will rebound as the value of the brand becomes clear.
Great brand builders understand that brands are built over time. Investors who understand this will invest in managers with integrity and a belief in branding. In the long run, a powerful brand always delivers lasting profits and strong investment returns.
One of the reasons brands are not reflected in stock price is that it is very hard to determine the precise value of a brand. Indeed, it is almost impossible to say what a brand is worth at any point in time. This means that it is hard to determine if a company is building its brands. Profits are very apparent. Brand health is not.
A manager looking to deliver strong short term results will rarely invest in brand building. Instead, the focus will be on short term promotions, cost reduction efforts and quick hit new products. Of course, this disconnect presents an opportunity. Savvy investors who are able to identify companies committed to brand building will be generously rewarded over time. While short term stock performance may be weak, in the long run results will rebound as the value of the brand becomes clear.
Great brand builders understand that brands are built over time. Investors who understand this will invest in managers with integrity and a belief in branding. In the long run, a powerful brand always delivers lasting profits and strong investment returns.
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Source : IIPM Editorial, 2011.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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