Brand valuation hp

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A report submitted to

Prof. Govindrajan

In partial fulfillment of the requirement of the course

Product and Brand Management

On 18th

September 2011

By Rakesh Gakare (B10021)

Sharath Ghosh (B10024)

Shishir Ramkumar (B10025)

Siddharth Goutam (B10030)

Brand Tracker

Phase III – Brand Valuation

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Executive Summary During the 1980’s there was spate of mergers and acquisitions wherein a trend was observed

that the acquiring companies were paying over and above the book value of the acquired company. This

enigma was resolved when experts came up with the theory that the brands have an inherent value of

their own. This time period was the birth period of the concept of the brand valuation. Brand valuation

is the process in which the total financial value of the brand is estimated. There are several

methodologies that are used for brand valuation but there is no universal methodology that can be used

for the valuation of all the brands. Interbrand’s brand valuation method comes the closest to being a

standardised method to value brands.

Interbrand’s method measures brand value under three pillars viz. financial performance of the

organization, role of the brand in the purchase decision and strength of the brand to ensure expected

future earnings. For the purpose of our research, a variation of this method was used to estimate the

value of the brand HP and two of its competitors (IBM and DELL).

The annual report of the three companies were analysed to create a model that will give us the

estimated economic profits for the next five years as well as till perpetuity. The CAGR which was used to

forecast the future cash flows was assumed by analysing industry reports. To calculate the role of

branding index and brand strength score a survey was undertaken with the help of questionnaire and

with a sample size of 50.

The brand value was calculated by multiplying the economic profit or the intangible earnings

and subsequently discounting it with the discounting rate derived from the brand strength score. HP

was valued at USD 23980.83 million while IBM was the leader with USD 39980.23 million and DELL stood

at meager USD 557.484 million.

From this exercise we recommend that HP should emulate the strategies followed by IBM, IBM

should continue with its innovative policies as well as its strategic acquisition policies and incorporate

the brand in its operational execution and decision making. Dell on the other hand must go for an

aggressive brand building campaign to differentiate the brand DELL from its products.

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Table of Contents

Executive Summary…………………………………………………..…………..…….….….. 3

Defining Brand Valuation…….……………………………………….…………………….. 5-9

Brand Valuation Approaches.…………………………………….………………….….… 10-12

Brand Value Measurement – Interbrand Model ………………………...……..… 13-18

Measurement of Brand Value………………………………………………………..…..… 13-18

Recommendation………………………………………………………………………………… 19-22

Annexure…………..…………………………….…………………………………………………… 23-31

Reference………….………………………………….………………………….…………………… 32

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What is a brand? A brand is an intangible asset. Some see it as a name or logo others say that it is just a symbol of what

the brand stands for. To the company that owns the brand it is a future generator of cash flows. A brand

exists only because of its commitment to its internal values. Without that it is just a glorified product

name. Determining the value of the brand is usually a combination of direct and indirect measures. A

direct measurement process is one that arrives at a price based on what it can add to the bottom line.

An indirect method is measurement will value the brand based on what it can add to the bottom line.

Why is a brand valuable? A brand is associated with tangible and emotional attributes that is intended to associate a good or a

service of one seller in order to differentiate them from other competitors selling the same kind of

goods or services. This makes a brand very valuable to the company that it belongs to

How did brand valuation originate? There was a wave of brand acquisition in the 1980’s that exposed the hidden value in highly branded

companies. This brought brand valuation into the forefront. This included Nestle buying Rowntree,

Grand Metropolitan buying Pillsbury and Danone buying Nabisco’s European businesses. The amount

being paid to acquire strongly branded companies was increasingly higher than the net value of the

tangible assets in the books of the companies. This resulted in huge amounts of “good will” arising on

the acquisition of the brands. This goodwill was disguised as a mix of intangible assets such as Brands,

Patents, customer loyalty, and distribution contracts.

Why are brands valued? Companies are increasingly recognizing the importance of brand guardianship and management as key

to the successful running of any business. The values associated with the product or services are

communicated through the brand to the consumer. Consumers no longer want just a service or product

but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream

secured by loyalty of customers who have ‘bought into’ the brand.

How Brand Equity Generates Value?

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Most brand valuations models are classified into 2 categories

a. Research based approach

b. Purely financially driven approach

Research based approach

There are several brand equity models that use consumer data to assess the relative strength and

performance of the brand. But the drawback of this is that it does not take into account any of the

financial aspects of the brands. Thus it essentially does not take into consideration the future cash flows

that the brand would generate which is the most essential reason for the existence of the brand. The

research based methods use consumer loyalty and buying behavior that have an impact on the

economic performance of the brand. All these models try to interpret and measure the consumer’s

perception towards the brand. This includes various perceptive measures such as awareness,

knowledge, familiarity, relevance, purchase considerations, preference, satisfaction and

recommendation.

But these methods do not take into consideration the effects of certain factors like R&D and the design

of the brand. Thus they do not provide a clear link between specific market indicators and the financial

performance of the brand. This is to say that even though there is a high brand loyalty and a high recall,

it may not translate into high brand value.

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Financially driven approach

1. Cost based approaches This method defines the value of the brand as all the cost incurred to bring the brand to the current

state. This is the sum of the developmental costs, marketing cost, advertising cost, sales cost and other

promotional cost etc. This is not a very accurate method for valuing a brand because there is no direct

relation between the costs incurred and the value added to the brand. Also for very old brands like Coca

cola which has been in existence for over 100 years, calculating this cost would not be possible.

2. Comparable Approach Another approach of valuing a brand is on the basis of comparison. But this is very difficult as the reason

for the existence of a brand is to create differentiation and thus there is no comparison possible.

3. Price Premium approach It is the value calculated as the net present value of the future price premiums that the brand can

generate over unbranded and generic competition. But most brands are intended not only top charge a

premium but also to secure future cash flows for the company by generating demand. The value

generation of these brands is in securing future volumes rather than securing premium prices. This is a

flawed method for products which do not have generic competition to which the premium price can be

compared.

4. Economic use approach Approaches that are driven exclusively by brand equity measures or financial measures lack either the

financial or the marketing component to provide a complete and robust assessment of the economic

value of brands. The economic use approach, which was developed in 1988, combines brand equity and

financial measures, and has become the most widely recognized and accepted methodology for brand

valuation. It has been used in more than 3,500 brand valuations worldwide. The value of the brand is

thus defined as the net present value of the future earnings generated by the brand.

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Interbrand’s Brand Valuation Methodology

Interbrand’s approach is on the following 3 economic functions. This is the most adopted respected

economic use approach and thus it forms the basis of our work in this part of the project

• Brand’s function to create cost synergies

• Brand’s function to generate demand for the product and services

• Brand’s function to secure future demand and therefore reduce operative and financial risks.

FIN

AN

CIA

L P

ERFO

RM

AN

CE Measures the

organisation's raw financial return to its investors

Operating Profit = Net Revenue - COGS - Indirect Expenses

Capital Charge = Industry WACC

RO

LE O

F B

RA

ND

Measures that portion of the decision to purchase that is attributal to the brand. This is exclusive of other aspects of the product like price or feature

BR

AN

D S

TREN

GTH

Measures the ability of the brand to secure the delivery of the expected future earnings. It is reported on a 0-100 scale where 100 is perfect based on evaluation across 10 dimentions of Brand Activation

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Interbrand’s method looks at the ongoing investment and management of the brand as a business asset.

This method takes into account all of the many ways in which a brand touches and benefits its

organization from attracting and retaining talent to delivering on customer expectations. The brand

value obtained can be used to guide strategic brand management so that the businesses can make

better and more informed decisions. There are 3 key aspects that contribute to the assessment; the

financial performance of the branded products and services, the role of the brand in the purchase

decision process and the strength o the brand.

Interbrand’s measures the brand strength of a brand on 10 parameters such as Commitment,

Protection, Clarity, Responsiveness, Authenticity, Relevance, Understanding, Consistency, Presence and

Differentiation.

i. Commitment: It is the measure of an organizations internal commitment or the belief in the

brand. It is the extent to which the brand receives support in terms of time, influence and

investment

ii. Protection: This component examines how secure the brand is across various dimensions. These

dimensions vary from legal protection to design, scale or geographical spread

iii. Clarity: The brand’s value, positioning and proposition must be clearly informed and circulated

within the organization, along with a clear view of its target audiences, customer insights

and drivers. It is vital that those within the organization know and understand all of these

elements, because everything that follows hinges on them.

iv. Responsiveness: This component looks at a brand’s ability to adapt to market changes,

challenges and opportunities. The brand should have a desire and ability to constantly

evolve and renew itself.

v. Authenticity: This component is about how soundly a brand is based on an internal capability.

Authenticity asks if a brand has a defined heritage and a well-grounded value set, as well as

if it can deliver against customers’ expectations.

vi. Relevance: This component estimates how well a brand fits with customer needs, desires and

decision criteria across all appropriate demographics and geographies.

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vii. Understanding: Not only should the customers recognize the brand but there must also be an in

depth understanding of its distinctive qualities and characteristics, as well as those of the

brand owners

viii. Consistency: this measures the degree to which the brand is experienced without fail across all

touch points and formats.

ix. Presence: This measures the degree to which a brand feels omnipresent and how positively

consumers, customers and opinion formers discuss it in both traditional and social media.

x. Differentiation: This is the degree to which customers perceive the brand to have a positioning

that is distinct from the competition

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Measurement of brand value

(for detailed workings please check the excel sheets attached)

• A variation of the Interbrand’s brand valuation model was used to calculate the brand value of

HP and its 2 competitors Dell and IBM.

• For the purpose of the research a questionnaire was designed and 50 respondents were

surveyed. This was done to find out the role of branding index and the brand strength score

(see annexure for the questionnaire).

Financial Analysis

• The annual reports of the parent companies of the 3 brands were analyzed to develop the

Discounted Cash Flow model.

• For the financial years ending 2008, 2009, and 2010 the figures were directly picked up from the

audited financial statements and for the year ending 2011, data was extrapolated from the

unaudited quarterly reports published.

• The overall growth of the industry was taken from an Forrester industry report and keeping that

as the base the assumed YoY growth rate for the next 5 years was arrived at. This growth

rate was kept same for the 3 brands for the ease of comparison. • All expenses have been

treated as a percentage of revenue while revenue, assets and current liabilities were treated

as a function of the growth rate.

• For extrapolating the expenses for the next 5 years the average value of the last 3 years have

been taken into consideration.

• The industry WACC was taken as the capital charge to arrive at the intangible earnings.

• Total assets – Current Liabilities = Net Plant Property and equipments

• (Net Plant Property and Equipments * Capital Charge) – NOPAT = Intangible earnings

Year Rate of growth

2012 12%

2013 12%

2014 13%

2015 12%

2016 11%

Terminal 5%

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Brand Index

• The Brand index is the parameter which leads to purchase of a particular brand apart from price

and feature.

• A research was conducted where the

respondents were asked to rate, on a

scale of 1 to 5 where 1 is the lowest

and 5 is the highest, IBM, HP and

DELL on the 10 parameters on the

Interbrand Valuation model

mentioned above.

• The mean scores for each parameter and

for each brand have been taken and

multiplied with weights.

• 10% weight age have been assigned to

each attribute. The weighted average

total and subsequently the brand index have been prepared for each brand.

• The above picture shows the position of each brand in the brand index.

• The closer the value to 0 the more diversified it is and is a Brand. The closer to 100 more

commoditized the products are. HP had a score of 61.52 which is close to the industry

average (industry average is 62).

Brand earnings = Intangible Earnings * Role of Brand Index

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Brand Strength

• For calculating the brand strength, the sum total of all the rates for the brands have been taken.

• Since brand strength is a relative measure the total of each attribute have been taken and

accordingly, by calculating the

average of the sum, weights have

been assigned to each attribute.

• The scores of each brand for each

attribute have been calculated by

multiplying the weights with the

average values.

• The sum total of all the attributes

gives the brand strength score for

the respective brands.

• The discount rate is used to calculate

the risk associated with the cash

flows of the brand. The assumption has been taken that the industry average WACC would

be the risk free rate.

• The industry WACC that has been calculated taking into consideration the 3 brands is the rate at

which the riskiness of the future cash flows for the Technology sector is the least.

• The industry WACC has been taken as the average WACC of the 3 brands under consideration.

Interbrand uses a proprietary algorithm which calculates the brand discounting factor from

the brand strength score.

• Here in our research, we have assumed that a brand strength score of 100 would entitle a

discounting rate which is equivalent to the industry WACC.

• The brand earnings were discounted with the brand WACC to arrive at the present value of the

future cash flows with year 0 being 2011.

Particulars Brand Strength Score WACC

Industry 100 9.46%

HP 60.95 15.52%

IBM 61.77 15.31%

DELL 59.88 15.80%

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Brand Valuation • All the present values of the future cash flows including the terminal cash flows were added to

arrive at the value of the brand in the year 2011

Brands Value (as of 2011) (values in million)

HP $23980.83

IBM $39980.23

DELL $557.48

IBM

12% 12% 13% 12% 11%

2012 2013 2014 2015 2016

Total Net Revenues 114852 128634 145356.1 162799 180706.7

Cost of Sales 62827 70366 79513 89055 98851

Cost of Sales as a % of Revenue 55%

Gross Margin 52025 58268 65843 73744 81856

R&D 7000.768 3551.713 4013.436 4495.048 4989.503

Cost of R&D as a % of Revenue 6.10%

Depreciation 4409.666 4938.826 5580.873 6250.578 6938.141

Depreciation as a % of Revenue 3.84%

Overheads 25679.56 28761.11 32500.05 36400.06 40404.07

Overheads as a % of revenue 22.36%

EBITA 14935 21016 23748 26598 29524

Applicable Taxes 3734 5254 5937 6650 7381

NOPAT 11201 15762 17811 19949 22143

Total Assets 142314.2 159391.9 180112.8 201726.4 223916.3

Current Liabilities 50880.97 56986.69 64394.96 72122.35 80055.81

NET PPE 91433.22 102405.2 115717.9 129604 143860.5

Capital Charge 8595 9626 10877 12183 13523

Intangible Earnings 2606 6136 6934 7766 8620

Role of Branding Index

Brand Earnings 1606.60 3782.27 4273.96 4786.84 5313.39

Brand Strength Score

Brand Discount Rate

Discounted Brand Earnings 1393.289 2844.58 2787.595 2707.576 2606.374

Terminal Growth Rate 26544.06

Brand Value 39980.29

Forecasted

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HP

12% 12% 13% 12% 11%

2012 2013 2014 2015 2016


Cost of Sales 108053 121019 136752 153162 170010

Cost of Sales as a % of Revenue 76.07%

Gross Margin 33997 38077 43027 48190 53491

R&D 3685.018 987.7843 1116.196 1250.14 1387.655


Depreciation 3601.114 4033.248 4557.57 5104.479 5665.972


Overheads 14872.58 16657.29 18822.74 21081.47 23400.43


EBITA 11839 16399 18531 20754 23037


NOPAT 9471 13119 14825 16604 18430

Total Assets 150521.3 168583.8 190499.7 213359.7 236829.3


NET PPE 88550.16 99176.18 112069.1 125517.4 139324.3

Capital Charge 8324 9323 10534 11799 13096



Brand Earnings 705.8212 2335.624 2639.256 2955.966 3281.123


Brand Discount Rate

Discounted Brand Earnings 610.9948 1750.204 1712.024 1659.857 1594.911



Forecasted

DELL

12% 12% 13% 12% 11%

2012 2013 2014 2015 2016


Cost of Sales 58505 65525 74044 82929 92051

Cost of Sales as a % of Revenue 81.75%

Gross Margin 13058 14624 16526 18509 20545

R&D 796.616 892.21 1008.197 1129.181 1253.391


Depreciation 815.5285 913.3919 1032.133 1155.989 1283.148


Overheads 8520.32 9542.759 10783.32 12077.32 13405.82


EBITA 2925 3276 3702 4146 4602


NOPAT 2340 2621 2962 3317 3682

Total Assets 51372.62 57537.33 65017.19 72819.25 80829.37


NET PPE 23505.87 26326.57 29749.03 33318.91 36983.99

Capital Charge 2210 2475 2796 3132 3476



Brand Earnings 78.84535 88.30679 99.78667 111.7611 124.0548


Brand Discount Rate 68.09007 65.85816 64.26814 62.16151 59.5871

Discounted Brand Earnings



Forecasted

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Inferences and Recommendations

HP • HP continues to evolve from a product to a services brand.

• In the course of its evolution HP needs to show that the innovation it is known for in its

hardware will be replicated in its new offers.

• The decision/ news that HP is planning on selling off its flagship PC, Laptop and Smart Phones

divisions has resulted in a comparatively low Brand strength score to its competitor IBM.

This in turn in the mind of the respondents the riskiness of the cash flows has increased

• HP in its new communication has to ensure that even with the sale of its flagship divisions and

subsequent foray into the services and software division it will still be able to maintain its

quality and innovativeness that made it a market leader in the hardware segment.

• HP can adopt the strategy of following the market leader as it can emulate the strategies that

IBM followed to become the world’s most valuable brand next only to Coca Cola.

IBM • IBM leads the pack with the brand value of almost $40 billion which shows that IBM’s

evolution from hardware to service to knowledge to innovation has been successful.

• IBM’s focus on emerging economies has allowed to tap into a goldmine by providing the

infrastructure to its developing clients

• IBM’s gamble to go for a social media initiative has leveraged its brand strength component

resulting in a comparatively higher brand strength score.

• IBM should continue with its strategic acquisitions policy as it leads to incorporation of best

practices, intellectual property rights and higher revenue in the organization.

• IBM has a low score in the commitment category, shows that the organization should

incorporate the brand as it is perceived by the consumers in its operational execution and decision

making. This will help IBM stay true to its positioning statement “Lets Build a smarter Planet”

DELL • DELL in the recent years has been trying to move away from its market oriented policies and

move into brand building.

• DELL has lost its dominance in the cloud computing segment to NEC and Fujitsu but still DELL

continues to do some exiting work in the social media

• DELL’s low score in both role of brand and brand strength shows that DELL is considered more of

a product than a brand.

• DELL has to an aggressive stance in its communication to its customers to ensure that its

consumers start recognizing DELL as a brand rather than a product as it is the brand which

will ensure its future cash flows, rather than the product as they can be duplicated and

made obsolete by the competitors.

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Questionnaire

Please select "only" one option per brand

* Required

Rate the following companies on a score of 1-5 (1 being the lowest and 5 being the highest) for

"commitment" *Commitment - the extent to which the brand receives support in terms of time,

influence and investment

1 2 3 4 5

IBM

HP

DELL


"protection" *Protection - examines how secure a brand is across a number of dimensions (legal

protection, proprietary ingredient, design, scale or geographic spread)

1 2 3 4 5

IBM

HP

DELL


"clarity" *Clarity - measures the degree to which the brand is truly dedicated to understanding and

defining their customer

1 2 3 4 5

IBM

HP

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1 2 3 4 5

DELL


"responsiveness" *Responsiveness - the brand's ability to adapt to market changes, challenges and

opportunity

1 2 3 4 5

IBM

HP

DELL


"authenticity" *Authenticity - if a brand has a defined heritage and a well grounded value set as well as if

it can deliver against customer's expectations

1 2 3 4 5

IBM

HP

DELL


"relevance" *Relevance - how well a brand fits with the customer's needs, decision and decision criteria

across all appreciate demographics and geographies

1 2 3 4 5

IBM

HP

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1 2 3 4 5

DELL


"presence" *Presence - the degree of how positively consumers, customers and opinion formers discuss

it in both traditional and social media

1 2 3 4 5

IBM

HP

DELL


"understanding"*Understanding - in-depth understanding of the brand distinctive quality and

charecteristics

1 2 3 4 5

IBM

HP

DELL


"consistency" *Consistency - the degree to which a brand is experienced without fail across all touch-

points and formats

1 2 3 4 5

IBM

HP

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1 2 3 4 5

DELL


"differentiation"*Differentiation - the degree to which customers perceive the brand to a positioning

that is distinct to its competition

1 2 3 4 5

IBM

HP

DELL

Submit

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Brand valuation hp