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Int. J. Mgmt Res. & Bus. Strat. 2013                                     Washington Macías Rendón and Katia Rodríguez Mora...
Int. J. Mgmt Res. & Bus. Strat. 2013                Washington Macías Rendón and Katia Rodríguez Morales, 2013model and th...
Int. J. Mgmt Res. & Bus. Strat. 2013                                 Washington Macías Rendón and Katia Rodríguez Morales,...
Int. J. Mgmt Res. & Bus. Strat. 2013                 Washington Macías Rendón and Katia Rodríguez Morales, 2013Maximum Cap...
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Int. J. Mgmt Res. & Bus. Strat. 2013              Washington Macías Rendón and Katia Rodríguez Morales, 2013 9.   Ratnatun...
Macias Rodriguez2013(11)(p.121-129)
Macias Rodriguez2013(11)(p.121-129)
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Macias Rodriguez2013(11)(p.121-129)

  1. 1. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013 ISSN 2319-345X Vol. 2, No. 1, January 2013 © 2013 IJMRBS. All Rights Reserved BRAND VALUATION: A REVIEW OF INTERBRANDTM AND BRAND CAPABILITY VALUETM MODELS Washington Macías Rendón1* and Katia Rodríguez Morales1 *Corresponding Author: Washington Macías Rendón,  Herewith, the authors present a review of InterbrandTM brand valuation model and Brand Capability Value (BCVTM) model developed by Ratnatunga and Ewing (2009), which have some issues in common. Therefore, the authors propose an addition to the BCV model based on some inconsistencies detected, and suggests the use of financial tools like the Capital Assets Pricing Model (CAPM) in order to estimate a discount rate used for brand valuation. Keywords: Brand valuation, Interbrand, Brand Capability Value, BrandingINTRODUCTION taken an important role in there search ofIt has been shown that intangible assets may academics and practitioners (Salinas and Ambler,become more valuable than tangible assets within 2009). Indeed, the International Organization forcompanies (Hulten and Hao, 2008) and it has Standardization (ISO) issued the 10668 Norm tobeen held that brands are considered the most standardize this practice in the firms that choosevaluable intangibles assets (ISO, 2010). to report the brand value as complementaryQuantifying the financial value of brands is information in their financial statements or anyrelevant to business activities since it allows, other purpose, as mentioned above.among other things, to conduct financial One of the best known brand valuationtransactions involving the brand, to report its value methodologies within the marketing communityto shareholders and the market (ISO, 2010), to is the one developed by InterbrandTM Consultingregister the outcomes of branding actions over Firm. Ratnatunga and Ewing (2009) extended thebrand equity and firm value (Salinas and Ambler, Interbrand brand valuation model by developing2009), to estimate royalties for trademark an approach that guides managers in theirlicensing contracts and count on an estimation budgets and processes of strategic decisionto demand monetary compensation in cases of making, focusing on the creation of brand infringements by third parties (Freno, 2007). This model is called Brand Capability Value,In consequence, the brand valuation has under- BCVTM, and it is considered an ex ante approach,1 Escuela Superior Politécnica del Litoral (ESPOL), Economics and Business School, Km. 30.5 Vía Perimetral, Guayaquil, Ecuador This article can be downloaded from 121
  2. 2. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013since it estimates the future impact of branding A Review of InterbrandTM Modeldecisions over the brand value. The brand valuation model of the Interbrand Group The BCV model was based on previous is a famous model that is very well accepted in the marketing community. However, it cannot bepapers, where was argued that companies need used by any practitioner since some of itsto focus on knowing how to combine all of its parameters, as the Brand Role Index and theassets to produce its ability to increase its Brand Strength Score, are estimated uponeconomic value (Ratnatunga Gray and formulas protected by the consultant, which isBalachandran, 2004). The BVC model uses the the one that markets the valuation called Expenses Leveraged Value Indices(ELVIs), in order to estimate the economic value Summing up, the Inter brand model has itsof company’s tangible and intangible assets, upon starting point in the company´s operating profits after taxes (or business unit´s), subtracting aits expense budget allocated to different type of charge for the invested capital, obtained from theassets (Ratnatunga et al., 2004; and Ratnatunga result between the amount of capital investedand Ewing, 2005). In other words, it is based on intangible assets and the cost of capital, in orderthe premise that the expenses budget goes to to reach what they call in tangible profit. Then,activities that create value and ELVIs reflect the the previous result is multiplied by the Role ofexpenses multiplier effect on the value of tangible Brand Index (RBI). The RBI is mainly determinedand intangible assets. through primary sources from market resear- In this paper, there are made some ches, where the goal is finding in what percentagemodifications to the BCV approach. For instance, the purchasing decision is generated by the brandit is considered in a different way the contribution instead of other determinants such as price orbrand factor in generating cash flows, in order to product attributes (Rocha, 2012).reflect that like the contribution of the brand in Finally, these projected earnings in the nextgenerating sales increases, the value of the brand five years are translated to present value with aalso increases. Besides, we suggest using, as discount rate that considers the Brand Strengthan input of the valuation model, a discount rate Score (Brand Strength Discount Rate), resultingfrom models like the Capital Assets Pricing Model into the brand value (Figure 1). Interbrand currently(CAPM), a widely used model in the financial field uses 10 components to obtain the Brand Strength(Graham and Harvey, 2001). A correction to one Score (Rocha, 2012):of the BCV model formulas is also made, which 1. Internal commitment (within the organization)has to do with the forecasted incremental value with the brand, in terms of time, influence andderived from the branding budget and ELVIs. investment. The next section summarizes the most 2. Brand protection which includes: legalimportant issues of the BCV and Interbrand protection, proprietorship ingredients ormodels and explains the additions suggested by design, scale or geographical jurisdiction.the authors in order to improve the measuring of 3. Clarity of values, positioning and brandbrand value. The final part is a conclusion about proposal within the organization, targeting thethe contribution of the proposed methodology. audience. This article can be downloaded from 122
  3. 3. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013 Figure 1: Interbrand Valuation Approach Source: Rocha (2012)4. Brand Responsiveness (adaptability) to 10. Differentiation from competition, based on changes in the environment. customers’ perception.5. Brand’s authenticity regarding to its distinctive Ratnatunga and Ewing model is based on an values earlier version of Interbrand model, which used 76. Relevance for customers’ needs desires and components for Brand Strength Score. decision criteria.7. Customers’ understanding (not only THE BCVTM MODEL knowledge) of brand’s distinctive qualities and The BCV model is based on projected cash flows characteristics. attributable to the brand, which are brought to a8. Consistency while experimenting with the present value. In this sense, the BCV model is brand, with regard to their expectations. aligned with the Interbrand Model. However, a9. Positive presence in traditional media and difference and main strength of BCV is the fact social networks. that the model can be used to optimize the This article can be downloaded from 123
  4. 4. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013branding budget, with the aim of increasing the consensual analysis conduced together theexpected value of the brand; due to this, the company executives.authors call this model an ex-ante model.Moreover, the model is participative, in the sense Review and Extension of BCV Modelthat many of its parameters are obtained from a Table 1 shows the main elements of the BCV Table 1: Changes on BCV Model BCV (Ratnatunga and Ewing, 2009) This Proposal To determine: To determine operating cash flow instead of sales, because of the • Current company sales (recent historical average) costs associated to the products or services sold. We call: • Maximum possible company sales (average of two • Cash flow Statu Quo, CFSQ subsequent years) • Cash flow Maximum , CFMAX To determine the brand contribution to the sales: The same • To separate the activities of the sales process and weigh their importance, ai • To determine the role of brand recognition in achieving each activity listed previously, bi • To estimate the total contribution of brand recognition, c: c = ai * bi To determine the maximun capability, M, and the current capability To determine: of the value of the brand, S: • Cash flows attributable to the brand, BCF, as a direct relationship Current Sales to the brand’s contribution factor: S  • Maximun capability, M, and the current capability value of c the brand, S, applying a discount rate, k, to the cash flows: SQ Maximum Sales BCF M  S  0 c k MAX BCF M  0 k • The discount rate can be estimated with the CAPM, where the risk factor  is inversely related to the brand strength score. Include an illiquidity premium. • The brand strength score could be an overall score based on a consumer market research evaluating the 10 Interbrand components, or a subjective evaluation by firm executives. To list variables (marketing activities) that contribute to brand To extend from 7 to 10 actual Interbrand components and their recognition, based on 7 Interbrand Brand Strength components weights, wi (previous version) and weigh their importance, wi (Equation 2, Ratnatunga and Ewing, 2009) dS N   M i  Si      ri Ei     i Si  dS N   M i  Si   dt i 1   Mi     ri Ei   pi   i Si  i 1 dt   Mi   To apply the model of change in the value of brand capability, optimizing To exclude the pi term, since it is already implicit in Ei , meaning Ei the branding budget: the total budget multiplied by the proportion spent on component where, i. N can include up to 10 components. N total number of components or brand strength variables. BCV model uses 7 components, following the previous Interbrand approach. To add dS/dt (corrected) to S0 in order to obtain the expected value ri: is the value-increasing ELVI multiplier of the ith component (value of the brand. generated per dollar spent). Ei:is the expense incurred in carrying out the activities of ith component. pi : proportionof the total budget supportaimed to the brand strength ith component. Mi: is the maximum capability value of brand, dueto ith component. Si : is the current capability value of brand, dueto ith component. i : is the value-reduction ELVI of the ith component. This article can be downloaded from 124
  5. 5. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013model and the improvement proposal as well as SQ BCFthe addition that are hold throughout this paper, S0  ...(2) kwhich are explained below. where, k is the discount rate for the cash flowBrand Contribution and Cash Flow attributable to the brand. Among the models toAttributable to the Brand estimate discount rates, according to a study byConsidering the weaknesses of the BCV model, Graham and Harvey (2001), the most widely usedit has been considered the proposal of a variation model is the CAPM. The risk reflected in the ratethereof. In first place, instead of assessing the should consider brand strength variables.brand from sales, it is suggested to use operating Interbrand uses an algorithm in which a highercash flow due to the costs involved in the goods score of brand strength means a lower discountor services of the brand. We define: rate, reflecting lower risk. This approach is BCFSQ (Brand Cash Flow, Statu Quo): Cash supported by studies demonstrating that withFlow attributable to the brand estimated without higher branding efforts and increased customerconsidering future marketing efforts to increase satisfaction, it is reduced the variability of cashbrand equity (Statu Quo). flows and company´s returns (Gruca and Rego, BCFSQ = CFSQ * c ...(1) 2005; and Krasnikov et al., 2009). In practice, this cash flow would be obtained An option proposed to relate the brand strengthfrom the average cash flow of the company or with the discount rate is similar to the approachbusiness unit, CFSQ, of recent years (e.g., 2 or 3 of Interbrand. In view of the fact that the discountyears) multiplying by a factor that reflects the brand rate should consider the characteristics of thecontribution to achieve cash flow, c, analogous industry of the brand being evaluated, itsto the Role of Brand Index of Interbrand. determination may obtain the information from As suggested by Ratnatunga and Ewing companies in the same industry that operate in(2009), the factor can be obtained from listing the the stock market.activities of the sales process of the assessed Suppose that the brand strength score iscompany, establishing a weight for each activity assigned from a market survey of its ten evaluatedin the total process, determining the percentage ithcomponents on a scale from 1 to 10. A score ofby which the brand recognition influences in the 1 should have to be associated to the highestdevelopment of each activity, and then multiplying risk and 10 to the lowest. These risk levels dependthe weights by the percentage of brand influence. on observed betas in the industry.In order toThe activities, their weights, and the percentages illustrate this, Figure 2 shows thestatisticalof brand influence are derived upon consensus information of unlevered betas of the restaurantamong company executives. industry in the United States, and upon it can beBrand Strength, Discount Rate and set an interval at 95% confidence with minimumCurrent Value of the Brand values of –0.42 and maximum of 2.14.Afterwards, we propose that the current value of The beta of 2.14 reflecting high risk levels ofthe brand, S0, should be obtained through the industry would have to be associated with lowestfollowing expression: brand strength score 1, while the beta of –0.42 This article can be downloaded from 125
  6. 6. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013 Figure 2: Histogram of Betas, Restaurants Industry, USA Statistics Unlevered Beta N Valid 51 Lost 0 Mean 0.859946 Std. Dev. 0.6520581 Skewness 0.845 SE in Skewness 0.333 Kurtosis 0.794 SE in Kutosis 0.656 Minimum –0.4393 Maximum 2.6100 Elaboration: Authorswould have to be associated with the highest a way to apply this is with a premium in thebrand strength score, 10, corresponding to this discount rate (Damodaran, 2005). If we add a 1%specific case, a discount rate even lower than illiquidity premium, the discount rate would be 2.32%.the risk-free rate, according to the CAPM1. Making the same exercise for a brand in the For example, for a brand of restaurants with a same industry, with brand strength score set tobrand strength score equal to 8, the unlevered 4, the equity discount rate including 1% of illiquiditybeta would be 0.51. Obtaining the information from premium would be 6.98%.the stock market on October 2012, the risk-free The BVC model used to treat the contributingrate would be 0.71%2. With an estimated risk factor of the brand in a way opposed to thepremium of 4.10%3, the resulting discount rate is proposal of this article. The cash flow of the1.32%. In addition, you can include an illiquidity company was divided by the factor, obtaining thepremium in the discount rate, because brands estimated brand value in the current situation.are less tradable than other kind of assets like However, with this treatment, a greater role of thestocks. There is evidence that investors spenalize brand would turn into a lower brand value, whichasset prices based on the perceived illiquidity and has no theoretical basis.1 Because of the negative beta of –0.42, the discount rate associated is lower than the risk-free rate.2 Source: Yahoo Finance. 5 years yield, average of the last month, October 16, 2012.3 Source: Damodaran Online. Historic estimated risk premium (1928-2011) over US treasury bonds. This article can be downloaded from 126
  7. 7. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013Maximum Capability Value of the Brand Ratnatunga and Ewing (2009) are proxies of theThe BCV model makes an estimation of the Interbrand brand strength components.maximum capability value of the brand, M0, with We propose the following equation for thethe same in consistencies described above. In change in the BCV in time, ds/dt, which correctsthis case, the maximum cash flow that could be the Equation (2) of Ratnatunga and Ewing (2009)achieved in future periods is divided by the brand excluding the pi term, which is implicit in the Eicontributing factor. One more time, a greater term:brand contribution used to result into a lower value N ds   Mi  Si  brand capability. dt   r E    i 1   i i Mi     i Si     ...(5) This proposal consists in using the maximumestimated cash flow, multiplied by the factor of where,brand contribution, obtaining the maximum cash N Total number of components and brandflow attributable to the brand, and then dividing it strengthby the appropriate discount rate: ri is the value-increasing ELVI multiplier of the MAX BCF ith component (value generated per dollar M0  ...(3) k spent). BCFMAX = CFMAX * c ...(4) Ei is the expense incurred in carrying out thewhere activities of the ith component. It is obtained by multiplying the total budget that supports M0 Maximum capability value of the brand the brand strength, by the proportion BCFMAX (Brand Cash Flow, Maximum assigned to the ith component. Capability): Maximum cash flows attributable to the brand. Mi is the maximum capability value of brand due to ith component. The BCFMAX is calculated upon the maximumcash flow that the company could reach in the Si is the current capability value of the brandprojection period, optimizing its branding budget, due to the i component.CFMAX, multiplied by the brand contribution factor. i is thevalue-decay ELVI multiplier of the ithChange in Brand Capability Value component, this implies that there must beThe contributionof the BCV model, which mainly a minimum expenditure to maintain thedifferentiates it from the Interbrand’s approach, value of brand that it permits estimating the change in the Both ELVIs, the one that increases value andeconomic value of the brand based on the the one that reduces it, are obtained fromassigned budget for N components (or activities) consensus among executives of the companyoriented to the construction of brand strength, and or business unit evaluated. This feature of thethe multipliers of value of those expenses, which approach has the advantage of being participative,are named ELVIs. The N components used by allowing the company abetter understanding of This article can be downloaded from 127
  8. 8. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013the determinants of its brand value, which is kept the efforts to improve the available methodologiesin our proposal. for professionals in marketing and finance areas.Projected Brand Capability Value REFERENCESThe value obtained with the above Equation (5), 1. Damodaran Aswath (2005), “Marketabilityrepresents the expected change in the BCV during and Value: Measuring the Illiquiditythe budget period, which added to the current Discount”, Working paper, New Yorkvalue, S0, would give the new expected BCV. University. Available at SSRN: http://Using this tool, managers can modify the budget in different components of brandstrength, to maximize the projected brand value, 2. Freno Michael (2007), “Trademark Valuation:without neglecting any of the activities. Preserving Brand Equity”, The Trademark Reporter, Vol. 97, No. 5, pp. 1055-1072CONCLUSION 3. Graham J and Harvey C (2001), “The TheoryThe BCV model for valuing brands has some and Practice of Corporate Finance:advantages. It is participative, in the sense that it Evidence From The Field”, Journal ofconsiders the internal consensus of company´s Financial Economics, Vol. 60, pp. 187-243.executives to determine the relative importance 4. Gruca T and Rego L (2005), “Customerof the activities involved in the sales process, and Satisfaction, Cash Flow, and Shareholdermultipliers of the expenses related to branding Value”, Journal of Marketing, Vol. 69, No. 3,activities. Besides, it allows an optimization of pp. 115-130.branding budget, since the brand projected valueis expressed in terms of expenses and 5. Hamada Robert (1969), “Portfolio Analysis,multipliers. However, the model has some Market Equilibrium and Corporation Finance”, The Journal of Finance, Vol. 24,inconsistencies in the treatment of brand No. 1, pp. 13-31.contribution factor, as it proposes an inverserelationship between the brand contribution and 6. Hulten C R and Hao X (2008), “What is aits value. Company Really Worth? Intangible Capital and the ‘Market to Book Value’ Puzzle”, The changes proposed in this paper correct NBER Working Paper 14548.the inconsistencies, suggesting a direct linkbetween the brand contribution and its value. 7. International Standard Organization (2010),Furthermore, we propose the use of tools ISO 10668: 2010 “Brand Valuation –available in the financial literature, showing how Requirements for Monetary Brandthey could be included in the process of Valuation”.estimating the value of a brand. Given the 8. Krasnikov A, Mishra S and Orozco D (2009),relevance that valuing brands has, which has “Evaluating the Financial Impact of Brandingbeen recognized by several authors (International Using Trademarks: A Framework andStandard Organization, 2010; Salinas and Ambler, Empirical Evidence”, Journal of Marketing,2009; and Freno, 2007), we consider important Vol. 73, No. 6, pp. 154-166. This article can be downloaded from 128
  9. 9. Int. J. Mgmt Res. & Bus. Strat. 2013 Washington Macías Rendón and Katia Rodríguez Morales, 2013 9. Ratnatunga J and Ewing M (2009), An Ex- Brand Capability Value of Integrated ante Approach to Brand Capability Marketing Communication”, Journal of Valuation”, Journal of Business Research, Advertising, Vol. 34, No. 4, pp. 25-40. Vol. 62, March, pp. 523-331 12. Rocha Mike (2012), Brand Valuation, A10. Ratnatunga J, Gray N and Balachandran K Versatile Strategic Tool for Business, R (2004), “CEVITA: The Valuation and Interbrand. Reporting of Strategic Capabilities”, 13. Salinas G and Ambler T (2009), “A Management Accounting Research, Vol. 15, Taxonomy of Brand Valuation Practice: No. 1, pp. 77-105. Methodologies and Purposes”, Brand11. Ratnatunga J and Ewing M (2005), “The Management, Vol. 17, No. 1, pp. 39-61. This article can be downloaded from 129