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Brand Risk Matters

Branding and the Risk Management Imperative

Susan Fournier and Shuba Srinivasan

Keywords

Brand Risk, Reputation Risk, Brand Dilution Risk, Brand Stretch Risk, Brand Cannibalization Risk, Socio-Economic Risk

The growth imperative
Driven by the shareholder imperative of driving growth in revenues, companies have become addicted to opportunities that expand their brand portfolios through mergers and acquisitions, new product introductions and line extensions. How new brands are incorporated into existing ecosystems – what is known as brand architecture strategy – is often ad-hoc rather than strategic and planned. These ad-hoc architectures can impose great risk and managers often underestimate it.
Our research shows that in contrast to predictions from marketing research, a sub-branding structure such as Apple’s i-products or BMW’s 7-, 5- and 3-series does not control risk, but in fact exacerbates it. This strategy registers the highest risk profile of all architectures. Managers pursuing sub-branding perceive a false sense of protection against risks of overextension, dilution and cannibalization. The reality is that the very qualities that commend this strategy – its ability to encourage broader participation in markets and extensions that are farther afield from the base brand – exacerbate risk.
Endorsed branding architectures like Post-it Notes by 3M create distance from the corporate brand. These are effective risk control mechanisms, but costs for building what are in effect two brands are higher and associated with returns lower in response.  Managers who seek ultimate risk control are advised to pursue the house-of-brands strategy with different brand names, albeit with costs to returns. If managers think they can control risk by diversifying brand architecture strategies, they should think twice: The hybrid mix does not offer enhanced risk control.

Box 2: Ten key questions to help managers assess brand risk

  1. Is your product category or brand heavily exposed to political risk?

  2. Judging from social media and press mentions, is your brand significantly embedded in the cultural conversation?

  3. Are your brand’s dominant meanings narrow in scope and tied to a particular product category?

  4. Is your brand heavily extended across multiple lines, a broad range of price points, or over multiple categories?

  5. Is the level of consumers’ brand knowledge and awareness higher than the level of brand liking?

  6. Is your brand strongly interconnected with a human such as a founder or celebrity endorser?

  7. Does your CEO or company founder have a blog or other public venue through which s/he regularly communicates with the public and media?

  8. Does your brand management team lack professionals skilled in crisis communications, media and public relations and the legal side of risk management?

  9. Is a high portion of your advertising budget for consumer traffic spent on digital advertising?

  10. Does your brand architecture connect brand offerings under the same brand umbrella?

 

The more often your answer is “yes,” the more exposed your brand will be to brand risk. Each individual “yes” demands attention and thoughtful management intervention to prevent possible brand damage.

How to successfully integrate a risk perspective into branding
Managing brands by managing risk is inherently different from managing brands according to a revenue rubric. The more exposed your brand is to brand risk (see Box 2 to assess your risk potential), the more attention this topic will need in your boardroom. Three mindset qualities are relevant in shifting marketing philosophy toward risk.

  • Be broad-minded in defining marketing competencies
    The risk-savvy brand manager needs to rethink the skills that define marketing competency. Crisis management is the backbone of the playbook, but in today’s hyper-sensitive marketplace, crisis management skills are not “emergency resources”; They are called upon to negotiate consumers’ brand meaning making each and every day. Ours is a world where threats to brand value can come in a lone tweet, a Facebook post, or a celebrity blog. Identify the specific risks confronting your brand. Estimate the potential for those risks. Determine a crisis response action plan. When training brand managers, take lessons from public relations and media professionals who truly understand how to embed brands in the fabric of daily living. Engage legal professionals skilled in the art and science of risk management. Enrich your management team with sociologists who understand the nature and dynamics of co-created brands.
     

  • Be self-critical
    Risk management focuses on the negative – threats, weaknesses and vulnerabilities rather than opportunities that drive top-line results. This requires a managerial mindset that is self-critical, a willingness to accept that conventional wisdom might not hold. In the world of risk, awareness can be harmful. Brand extensions can destroy brand assets. Brand risks may not diversify through a mixed portfolio strategy. The risk manager must take care not to assume in a game whose rules are changing. Thoughtful after-action reviews will provide needed insight into failed strategies.
  • Be proactive
    Effective brand risk management requires managers to think systematically about the types of risks facing their brands. A risk assessment will reveal not only individual vulnerabilities but also category differences in inherent risk profiles, and this will inform marketing actions. Luxury brands are more susceptible to dilution risk than any other category because of their exclusivity associations. Lifestyle brands are exposed to greater reputation risk because they tap deep, sometimes hotly-charged cultural values. Person brands such as Martha Stewart face a completely different set of risks as compared to packaged good brands: persons die, they have families and friends, they act spontaneously, and these human qualities affect risk-return profiles. The type of relationship that consumers form with a brand also matters from a risk perspective. Hupp, Robbins and Fournier (pp. ) identify “at-risk” relationships that need special attention in times of crisis to stem the loss of brand value. Hanssens, Fischer and Shin  (p….) note that marketing managers need insight into how marketing decisions affect cash flow volatility, and offer recommendations on how volatility risk can be monitored and managed.

Opportunities and risks in brand management are as inextricably linked to each other as light and shadow. Being aware of the shadow – its possible shapes, its different intensities and all the angles it can emerge from – will cultivate preparation and prevent stumbling in the dark.

Authors

Susan Fournier, Senior Associate Dean, Questrom Professor in Management and Professor of Marketing, fournism@bu.edu

Shuba Srinivasan, Norman and Adele Barron Professor in Management, Professor of Marketing,ssrini@bu.edu

Both: Boston University, Questrom School of Business, Boston, MA, USA.

Further Reading

Fournier, Susan and Avery, Jill (2011): “The Uninvited Brand,” Business Horizons, Special Issue: Social Media, 54 (May/June), 193-207.

Hsu, Liwu; Fournier, Susan and Srinivasan, Shuba (2016): “Brand Architecture Strategy and Firm Value: How Leveraging, Separating and Distancing the Corporate Brand Affects Risk and Returns,” Journal of the Academy of Marketing Science, 44 (2), 261-280.

Madden, Thomas J.; Fehle, Frank and Fournier, Susan (2006): "Brands Matter: An Empirical Demonstration of the Creation of Shareholder Value through Brands," Journal of the Academy of Marketing Science, 34 (2), 224-235.

Srinivasan, Shuba and Hanssens, Dominique M. (2009): “Marketing and Firm Value: Metrics, Methods, Findings and Future Directions,” Journal of Marketing Research, 46 (3), 293-312.

Srinivasan, Shuba; Hsu, Liwu and Fournier, Susan (2012): “Branding and Firm Value,” The Handbook of Marketing and Finance, S. Ganesan and S. Bharadwaj (eds.), Northampton, MA: Edward Elgar Publishing, 155-203.