Losing brand value

Chuck Martin’s On the Mind column in the latest issue of Darwin Magazine had an interesting story on how to lose brand value. He talked about the difference in service between his local Mercedes-Benz dealer and his Ford dealer. As you can probably guess, the Mercedes dealer showed a complete lack of interest in customer service:

Even while some companies can focus on creating and delivering great products at the right price, all that effort can be wasted if not properly handled at the local level. This is a version of the concept of thinking globally while acting locally.
The relationships and the competition in each marketplace can be totally different, requiring different approaches, as appropriate. The same holds true for delivery and service of national products at the local level. And the irony is that actions at the local level can impact perceptions of the global brand, at least within a given market.
As a small example, when I had my Mercedes-Benz serviced at a local dealer over the course of a year, most service visits required a second or third visit to complete the repairs. It negatively impacted the brand, at least at a local level.
. . .
By contrast, when I had my Ford serviced at its local dealer, virtually every service experience over the course of a year was positive. I was greeted by name, the service was completed on time and the price was as quoted.

I guess I am not very surprised at the local Mercedes dealer’s lack of understanding of the value of his brand. Too often companies (and local dealers) fail to understand the fluid nature of brands: the top brands today can quickly become yesterday’s also-rans and the lower tier brands can leap to the top. The example of Samsung is a case in point, as we discussed in an early posting.
As Chuck points out, the rise of hype-fast communications networks (not just the Internet, but phone text-messaging creating “smart-mobs”) raises the stakes for brand management. Look at what happened to the value of Coke stock globally after an isolated incident in Belgium.
But the issue is more than just how a local perception affects a global brand. Maintaining brand value is a constant struggle between upholding universal standards (corporate HQ “total control”) versus localization of the product and service. McDonald’s has always been the old text book case – a standardized product (reinforced by training at McDonald’s University) with permitted local variations (non-beef patties in Hindu India, use of peanut oil for fries in SE Asia). If the local variations are not allowed, then the brand risks local irrelevancy. This loose-tight organizational dynamic is one that every company needs to master, especially as the services part of the value-creation equation becomes more and more important in this intangible economy.

Deficits, deficits and more deficits

The Intangible Economy doesn’t mean an economy that is intangible. It means an economy powered by the value created by intangibles (knowledge, innovation, technology, skills, etc). It can not exist “in the air” but grounded in both physical resources (tangibles) and financial resources.

Now we have the latest deficit projections from the Congressional Budget Office (as reporting in the Wall Street Journal):

As details of President Bush’s new $80 billion request for wars in Iraq and Afghanistan were emerging Tuesday, Congress’s top budget analyst projected $855 billion in deficits for the next decade even without the costs of war and the administration’s Social Security plan.

. . .

The projection, for the years 2006 through 2015, is almost two-thirds smaller than what congressional budget analysts predicted last fall. But the drop is largely due to estimating quirks that required it to exclude future Iraq and Afghanistan war costs and other expenses. Last September, their 10-year deficit estimate was $2.3 trillion.

The CBO now also projects this year’s shortfall will be $368 billion. That was close to the $348 billion deficit for 2005 it forecast last fall. If the estimate proves accurate, it would be the third-largest deficit ever in dollar terms, behind only last year’s $412 billion and the $377 billion gap of 2003.

Besides lacking war costs, the budget office’s deficit estimates also omitted the price tag of Mr. Bush’s goal of revamping Social Security, which could cost $1 trillion to $2 trillion and dominate this year’s legislative agenda. Also left out were the price of extending Mr. Bush’s tax cuts and easing the impact the alternative minimum tax would have on middle-income Americans, which could exceed $2.3 trillion, the report said.

As every economist worth their salt has been saying, this trend is unsustainable. This morning’s Financial Times of London ran a story on how foreign central banks are moving away from the dollar as a reserve:

Central banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration’s difficulties in financing its ballooning current account deficit.

In actions likely to undermine the dollar’s value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US.

A major intangible asset of the United States is our credit rating and the financial power of the dollar. With red ink as far as the eye can see, I would how long this intangible asset will last.

Copyright (or wrong?)

Last week, American University’s Center for Social Media released its study Untold Stories: Creative Consequences of the Rights Clearance Culture for Documentary Filmmakers. The report used numerous examples to illustrate how our copyright system has spun out of control. Stories about the reprt in the Washington Post, the Toronto Global and Mail
and Wired appropriately focused on the example of how the famous Eyes on the Prize documentary of the civil rights movement can no longer be shown – because all of the copyright permission for the clips used have expired.

The implications of this “clearance culture” are clear:

These rights practices consume time that might be better spent on the creative enterprise of the film itself, and sap already-strained budgets. More importantly, filmmakers often shape their film projects to avoid the problem of rights clearance, omitting significant details. On some occasions, the avoidance of clearance problems may help to dictate filmmakers’ choices of subject-matter, influencing them (for example) to avoid projects involving current events or modern history – which tend to be minefields rather than mere thickets because strict compliance through licensing is required.

Now, copyrights (and other forms of intellectual property protection) are an important tool for protecting intangible assets. But, as this story points out, they can also become major barriers to the creation of new intangible assets. As any good Schumpeterian knows, the forces of creative destruction need to be able to operate if economic growth is to be sustained. This lesson holds especially true for in the intangible economy where ideas are built on ideas and knowledge builds on knowledge. Finding a new balance between the rights of IPR holders and users will be a major public policy task as we move forward.

One of the places to start is with a reinvigorated fair-use doctrine, which allows use of copyrighted materials for purposes of teaching, commentary and criticism. But, many feel that fair-use provides only marginal benefit and has been gradually whittled away. Larry Lessig, in his book Free Culture, warns of the risks and cost of relying on fair-use as a legal defense.

Another suggestion in the report concerns the creation of a central clearance process – a one-stop shop for obtaining copyright permission. A variation on this is the Creative Commons alternative copyright. Under this approach, authors can pick and choose which rights to retain and which are automatically waived. For example, material publish on this blog utilizes the Creative Commons approach to automatically waive copyright for any non-commercial use as along as attribution is given while retaining copyright control over any commercial use.

All of this is an attempt to find the right mix of protection and use. As a recent article in the USC Annenberg’s Online Journalism Review, “Send ‘free’ to work: Creative Commons brings copyrights into the digital age”, “The challenge for the owners of intellectual property is how to make “free” work for them.” But the task goes beyond making copyright work for owners – it must work for all of us, including for future generations. It would be ironic indeed if in the name of fostering the creation of information, our legal framework conspires to prevent the documentation of the information age.

Thanks to Olga Francois at digital-copyright email list for alerting me to this story. To subscribe to the digital-copyright email list, e-mail: digital-copyright-digest-subscribe@lists.umuc.edu

(mis?) measurement in financial services

One of the tidbits that came out of the Advancing Knowledge conference (see previous posting) was a nice example of how our current thinking inadvertently penalizes investment in intangibles. This is from Bob Hunt, a senior economist at the Federal Reserve Bank of Philadelphia:

The standard efficiency analysis for commercial banks is to examine some variation of the ratio of non-interest expense to average assets.

Bank expenses are divided into two large categories – interest expense and non-interest expense. Interest expense is the cost of borrowed funds (e.g. deposits), but the primary focus is on non-interest expense, which includes such things as the cost of buildings, etc.

One problem with this measure is that banks don’t amortize much of their investments in new products and services, or in reducing the cost of providing existing services. In particular, banks have no conception of investing in research and development. This is all expensed, and it appears in the non-interest expenses of the bank. As a result, a bank that is investing heavily in new products and services may appear less efficient than a bank that isn’t making these investments.

Yet, efficiency is an important measure of the health of a nation’s banking sector and a key economic goal of the financial regulations. It has become clear that financial institutions have been using technology and other innovations to become more efficient. But as Dr. Hunt points out:

Our accounting for this sector is rooted in a very static view of the industry even though there is ample evidence of financial innovation in the U.S. over the last 30 years.

We simply don’t have an accurate measure of R&D performed by the financial services sector. Some recent input-output tables performed by the Bureau of Economic Analysis suggests that this sector produced about $20 billion of software for its own use. Based on the conventional accounting, it appears that nearly all this effort was expensed.

NSF is now generating estimates of R&D in financial services in its survey of industrial R&D, but that is a very recent innovation and it is not exactly clear who is being surveyed and what is being measured.

Any new measure of innovation in the financial services sector would be a welcome step, but can not stop at simple estimated of R&D. As I have argued before, we need a survey of innovation, similar to the EU’s Community Innovation Survey – not just a measure of R&D. At best, R&D is a proxy measure of inputs to the innovation system. At worse, it is a misleading indicator of how well we are doing. We need to do better.

Brands – again

This may fall into the beating-a-dead-horse category, but this morning I picked up my latest issue of The Economist to find Samsung touted as the poster child of brand value in the digital age. Not one of those top US brands that PPI bragged about (see my posting yesterday) but the upstart from Asia.

Samsung was once best known for making things like cheap microwave ovens. In the past few years it has transformed itself into one of the “coolest” brands around, and is successfully selling stylish flat-screen TVs, digital cameras and mobile phones. After a record-breaking year, it is poised to overtake Motorola as the world’s second-biggest maker of mobile phones. And it is snapping at the heels of Japan’s Sony for leadership in the consumer-electronics business.

This would have seemed inconceivable a decade ago. But Samsung has proved that a combination of clever brand-building and well-designed, innovative products can work miracles. In such a competitive market, a brand without good products will quickly fade. But the real surprise is that the opposite is also true. The market is crowded with firms with a few snazzy products, but weak brands. To thrive and grow on the scale Samsung has achieved requires a strong brand, as well as innovative products.

In all fairness I must mention that the Economist also gives a tip of the hat to a US brand: Apple. But the point remains, strong brands alone are not enough to guarantee economic success. Yesterday’s second-string brand may become today’s powerhouse. And today’s health of a nation’s inventory of brands is no indicator of tomorrow’s prosperity.

Brands and trade

My friends at the Progressive Policy Institute sent me an email today with their latest Trade Fact of the Week contrasting two views:

The CIA’s National Intelligence Council last week, in a report on the possibilities of the world in 2020, noted the rapid growth of India and China and wondered about the possibility of an “Asian century.” One piece of evidence is the growing international appeal of Asian popular culture: Japanese anime and manga, Korean music, Chinese and Indian cinema, and so on.
On the other hand, Western business and entertainment brands seem still to be in pretty good shape. Since 2001, the consulting firm Interbrand has joined with Businessweek to publish an annual list of the world’s top 100 “brands,” defined as the likely future earnings of a company name. The brand values range from $67 billion (Coca-Cola) to $2 billion (Polo); they are distributed around the world as follows:

• Fifty-eight of the brands are American, including the top seven and 13 of the top 16. The diversity of the American list is striking: the top 20 U.S. brands range from high-tech businesses Microsoft, IBM, Intel, HP and Cisco; to diversified manufacturers GE and automaker Ford; Disney in entertainment; consumer-goods firms Coca-Cola, Marlboro, Gillette, and Pepsi; fast-food chain McDonald’s; and financial services providers Citibank and American Express.
• Thirty-four brands are European, among these Nokia leads in eighth place. The remaining 33 are split fairly evenly: nine are German, eight French, four and a half British (giving half credit for ownership of Shell to the U.K and half to the Netherlands), four Swiss, three and a half Dutch, three Italian and one Swedish. These are more nationally specialized than the American list: four of Germany’s nine entries are automakers, while Italy’s three members are high-end fashion firms Gucci, Prada, and Armani. The British entries, a bit more diverse, include the Hong Kong and Shanghai Bank, the Reuters news service, two energy companies and a liquor firm.
• Eight firms are Asian, led by Toyota at ninth place, Honda and Sony in 18th and 20th, and Korea’s Samsung in 21st. The other four are Japanese: Canon, Nintendo, Panasonic, and Nissan. No firm on the list is based in mainland China, Hong Kong, or Taiwan. Neither do India, Southeast Asia, Latin America, the Middle East, or sub-Saharan Africa have entries.

While I often agree with PPI’s point of view (and sometimes don’t), I have to take exception with their analysis. Brands are a very, very, very important intangible asset. But they are only part of the value equation. Brands are marketing devices – signals of quality, consistency, etc. As such, they allow a company to capture a higher portion of the value-added.

However, except for those pure service providers, there is still a portion of value in the intangible economy created by the tangible product itself. As our huge trade deficit attests, many of those things being sold under those American brands are made elsewhere, especially in countries that currently have no leading brands on the list (China, India, and Southeast Asia).

If history teaches us anything, it is that economies are not static. A number of those brands, both US and foreign, were not around or not as powerful 20 or 30 years ago. Simply because we lead in the number of brands today is no assurance that the scenarios outlined by the CIA are not accurate. We need to continue to build on our brand strength – not assume that it will carry us forward. As they warn in the financial markets, past performance is no guarantee of future success.

Advancing Knowledge and the Knowledge Economy

Last week I was at a fascinating conference on Advancing Knowledge and the Knowledge Economy. Held at the National Academy of Science main building here in Washington, it focused on the transformation of knowledge:

Knowledge assumes many forms and behaves in anomalous and unpredictable ways. Unlike the tangible resources of the industrial economy, there is little shared understanding of knowledge as an economic factor despite its immense importance in the global economy. Yet the knowledge-based economy, conventionally measured by the composition of the workforce, is in flux. It is plainly characterized by an explosion of data and codified knowledge, propelled by a revolution in information and communication technologies, but the changes go much deeper.
The generation of knowledge is traditionally conceived as a process internal to single entity. But it is increasingly a product of networked entities, often differently situated yet motivated to find new solutions to specific problems, needs, and circumstances – and, in many cases, to reveal these solutions to others. Enabled by technology, knowledge moves quickly within these networks – across firms, institutions, borders, and distances. While scientific research has long been characterized by unfettered circulation of discoveries and the ability to build instantly on these discoveries, distributed models are gaining importance and becoming essential to the larger fabric of the knowledge-based economy.

Abstracts are available at the conference website; the actual papers and presentations are not yet up, but should be available soon. The website also contains a link to a couple of relevant OECD papers (OECD being one of the major sponsors).
One aspect of knowledge very much in play at the conference was serendipity. Throughout the two days, I picked up little gems of insight and information that were not part of the speaker’s main message. Rather than try to summarize the presentations, I will be posting these tidbits over the next few days.

Underestimating savings

While the account profession continues to resist counting research and training as an investment, there is some slight movement at the level of macroeconomic statistics. Recently, the Bureau of Economic Analysis (BEA) and the National Science Foundation (NSF) announced a new project to look at the issue. The project would create a “satellite account” for the R&D portion of the GDP numbers — including looking at the issue of treating R&D as an investment (i.e. capitalizing the cost over a number of years, similar to what is already done with plant and equipment, rather than expensing it). According to research by BEA economists, our current treatment of R&D as an expense underestimates our national rate of savings by approximately 2 percentage points.
As Michael Mandel points out in a recent column in Business Week, this underestimation distorts our policy debates and focuses attention on the wrong priorities:

The coming debates over tax reform and private accounts for Social Security are going to be framed in terms of the savings rate as well. All the proposals for overhauling the tax system are geared toward putting more of the weight of taxation on consumption, and less on savings and investment. And many supporters of Social Security privatization claim that the current system lowers savings, because Americans rely on the government to fund their retirements rather than putting money away themselves.
In the end, what will propel growth is human capital and innovation. It’s the hidden savings rate that deserves the attention, not the official one.

This mirrors an argument that Baruch Lev has repeatedly made about the expensing of corporate R&D. It has always surprised me that the high-tech community has focused exclusively on the issue of stock opinion and completely ignored the issue of capitalizing of R&D. Part of the problem has been accountants’ concern over the validity of the procedure. The movement by the economists in charge of macroeconomic statistics toward capitalization of R&D in the national accounts may give a new push to the business accounting issues. After all, these folks are hardly a radical bunch. And if they say this is the right thing to do for the national accounts, it is going to be harder for people to say it can’t be done at the firm level.

Inclusion in the Intangible Economy

The Martin Luther King, Jr. Holiday is more than just a day off. It should be a time to reflect on where we are in meeting Dr. King’s Dream and the American goal of an inclusionary society. An inclusionary society is absolutely necessary for the functioning of an intangible economy. As Richard Florida and others have pointed out, creativity thrives where there is diversity and tolerance. In this intangible economy, we can not afford to exclude any human assets.
The intangible economy is also the networked economy. Metcalf’s Law roughly states that the value of a network increases exponentially in relation to the number of participants. The same is true for that network of productive activity we call the economy. By leaving some behind, we impoverish not only those individuals; we also impoverish ourselves. By empowering and embracing others, we also empower ourselves.
Let us continue to keep this in mind, not only today, but always as we strive to build an inclusionary intangible economy.