V O LU M E 2 1 | N U M B E R 4 | FAL L 2 0 0 9

Journal of
APPLIED CORPORATE FINANCE
A MO RG A N S TA N L E Y P U B L I C AT I O N

In This Issue: Market Efficiency and Risk Management

The Global Financial Crisis and the Efficient Market Hypothesis: 8 Ray Ball, University of Chicago
What Have We Learned?

Contingent Capital vs. Contingent Reverse Convertibles for 17 Christopher L. Culp, Compass Lexecon and
Banks and Insurance Companies University of Chicago

International Insurance Society Roundtable on Risk Management After the Crisis 28 Panelists: Geoffrey Bell, Geoffrey Bell & Company;
Nikolaus von Bomhard, Munich Re; Prem Watsa and
Bijan Khosrowshahi, Fairfax Financial Holdings.
Moderated by Brian Duperreault, MMC

Lessons from the Financial Crisis on Risk and Capital Management: 52 Neil A. Doherty, University of Pennsylvania’s Wharton
The Case of Insurance Companies School of Business, and Joan Lamm-Tennant,
Guy Carpenter & Co. and the Wharton School

The Theory and Practice of Corporate Risk Management 60 Henri Servaes and Ane Tamayo, London Business School,
and Peter Tufano, Harvard Business School

Measuring the Contributions of Brand to Shareholder Value (and How to Maintain or 79 John Gerzema, Ed Lebar, and Anne Rivers,
Increase Them) Young & Rubicam Brands

Creating Value Through Best-In-Class Capital Allocation 89 Marc Zenner, Tomer Berkovitz, and John H.S. Clark,
J.P. Morgan

Using Corporate Inflation Protected Securities to Hedge Interest Rate Risk 97 L. Dwayne Barney and Keith D. Harvey,
Boise State University

The Gain-Loss Spread: A New and Intuitive Measure of Risk 104 Javier Estrada, IESE Business School

Assessing the Value of Growth Option Synergies from Business Combinations 115 Francesco Baldi, LUISS Guido Carli University, and
and Testing for Goodwill Impairment: A Real Options Perspective Lenos Trigeorgis, University of Cyprus
Measuring the Contributions of Brand to Shareholder Value
(and How to Maintain or Increase Them)
by John Gerzema, Ed Lebar, and Anne Rivers,
Young & Rubicam Brands
inancials alone cannot explain why some
B
F companies outperform their competitors.
Macroeconomic factors, the quality of the
management team, expected growth rates, and
the value of the brand can help explain why some companies
break out of the pack. But quantifying the value of such
intangibles is not an easy task.
Since 1993, Young & Rubicam has invested over
$130 million in collecting and interpreting data on
consumers’ perceptions of some 44,000 product and service
brands in over 50 countries. At the core of Y&R’s research
effort is the BrandAsset® Valuator (or “BAV”), a model
that converts the firm’s hoard of data on global consumer
perceptions and behavior patterns into assessments of brand
strength and value. When combined with the findings of
independent research by academics in marketing and finance
(using Compustat data on corporate operating and stock-
price performance), the BAV’s assessments of brand values
can be used to quantify the contributions of brands to both
corporate earnings and market values.
Another important corporate use of the BAV is to provide
insight into what causes brand values to rise and fall—and, in
some cases, recover. For each of the more than 44,000 brands
covered in our database, we have identified (or in many cases
“developed”) and tracked more than 80 brand metrics, which
include indicators of consumer awareness, perceptions and
preferences, and usage. With the help of such metrics, our
BAV model breaks down the value of a brand into four
major components that we call “Energized Differentiation,”
“Relevance,” “Esteem” and “Knowledge.” And as we suggest
in the pages that follow, a solid understanding of a brand’s
positioning along each of these four dimensions can be used to
guide companies in maintaining and building their brands.
One of the main findings of the research cited above is
that brands contribute to the market value of companies
by increasing not only current earnings, but also the price-
to-earnings (P/E) multiples that investors assign to current
earnings. Such increases in P/E multiples in turn reflect
investors’ expectations for lower risk, higher growth, or
both. And while only about one-third of the total estimated
1. This is the main thesis of our recently published book, John Gerzema and Ed
Lebar, The Brand Bubble (Jossey-Bass, 2008).
Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication
effect of brand equity on corporate values is reflected in
current earnings, the remaining two-thirds of a brand’s
contribution to value is attributed to its effect on investors’
expectations.
So that’s the good news about brands and their
contributions to value. But our research also has a more
troubling message: In more recent consumer surveys (during
2005–2007), we began to find signs of brand erosion even as
the markets were pushing up share prices, presumably with
the expectation that intangibles like brand would continue
to drive operating earnings in the future. More specifically,
while Wall Street was bidding up the aggregate value of
branded businesses, our research suggested that consumers’
overall perceptions of brands were becoming less favorable.
Indeed, we were finding steep declines in consumer ratings of
all of what we view as the four key classical “attitudes” toward
brands: “trust,” “awareness,” “consideration” and “regard.”1
This disconnect between brand values and share prices—
though somewhat reduced by the market decline associated
with the financial crisis—underscores the reality that the
perceptions that influence the dollar votes of consumers
on Main Street can be very different from the financial
analysis used by traders and analysts on Wall Street. Even
with stock values well below their peaks, we believe that the
mismatch between consumer attitudes toward brands and
the market values of the companies that produce and own
them continues to be a threat. It raises the possibility that
many branded businesses are overvalued—and that, when the
“brand bubble” reflected in their stock prices deflates, their
valuation multiples and stock prices could fall again.
In the meantime, for the leaders of consumer-facing
corporations, the mismatch between stock prices and
brand values points to a continuing challenge for brand
management. Building brand value is important for both
finance professionals trying to increase shareholder value
and marketers trying to build brand value and increase
sales and margin. The aim of our research is to bring these
two groups—finance and marketing—closer together by
demonstrating the role of marketing strategy and brand
equity in driving shareholder value.
• Fall 2009 79
Figure 1 BrandAsset Valuator Model
ENERGIZED
DIFFERENTIATION
The brand’s point
of difference RELEVANCE
Relates to margins How appropriate
and cultural currency the brand is to you
Relates to consideration
and trial
BRAND STRENGTH
Leading Indicator
Future Growth Value
The Four Pillars of Brand Value
The BrandAsset® Valuator model measures the overall health
of a brand by assessing four of its distinctive components, or
“pillars”:
• Energized Differentiation
• Relevance
• Esteem; and
• Knowledge
Each of the four contributes in a different way to building
brand and sales. Energized Differentiation is a composite
measure of five brand attributes tracked by the BAV:
“uniqueness,” “offering,” “pricing power,” “innovation” and
“dynamism. ” Relevance aims to capture the appropriateness
of a brand to consumers and is strongly related to market
penetration. Both of these pillars, Energized Differentiation
and Relevance, have proved to be leading indicators of a
brand’s direction and momentum. And when combined into
a single category that we call Brand Strength (as shown in
Figure 1), the two pillars provide a forward-looking measure
of brand value.
By contrast, the third and fourth pillars, Esteem and
Knowledge, are current indicators that together determine
Brand Stature. A brand’s Esteem is evaluated using measures
of respect, perceived quality and reliability, and is generally
viewed as a prerequisite for building loyalty. Knowledge is the
culmination and consequence of brand building and reflects
a consumer’s depth of experience with the brand.
In Figure 2, we try to suggest how our four-pillars
framework can be used to assess a brand’s health and to
diagnose possible problems and solutions. For example, the
prescription for brands that score higher on Knowledge than
Esteem typically involve efforts to persuade consumers to
take a fresh look, with the aim of differentiating the brand
80 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
ESTEEM
How you regard
the brand KNOWLEDGE
Relates to perceptions
An intimate
of quality and loyalty
understanding of the brand
Relates to awareness and
consumer experience
BRAND STATURE
Current Indicator
Current Operating Value
and building consumer respect and, eventually, some degree
of loyalty. By contrast, in cases where Esteem is greater than
Knowledge, the brand generally has an opportunity to expand
market share by increasing consumer awareness.
Brand Metrics Help Explain Stock-Price Performance
There is an old adage that says, “The value of something that’s
truly innovative can’t be measured.” With the help of our
BAV, researchers have provided persuasive evidence that a
strong brand can raise a company’s market value by increasing
not only its current revenues and profits, but also analysts’ and
investors’ expectations for future profits.
To measure how brands affect both the current and future
financial performance of their enterprises, we have combined
our 16 years of BAV data on a large sample of multinational
“mono-brands” with data on corporate earnings and stock
prices from Standard & Poor’s Compustat database at the
University of Chicago’s Center for Research in Security
Prices. Mono-brands are companies like Intel, McDonald’s,
and Microsoft that stake their entire name on a single “power”
brand and derive more than 80% of their annual revenue
from that brand.
With the help of marketing professors Robert Jacobson of
the University of Washington and Natalie Mizik of Columbia
Business School, we analyzed a large number of consumer
variables for such companies with the aim of identifying
the brand attributes that are most successful in explaining
unanticipated increases in stock prices. By “unanticipated,”
we mean those stock price changes that cannot be explained
by simultaneous changes in corporate fundamentals such as
sales and operating returns on capital.
One outcome of this joint effort was a regression model
that, using our BAV data, links increases in brand asset values
Figure 2 BrandAsset Valuator Model – Diagnosing Brands

The brand has captured attention and
interest and can build relevance and
penetration. This often reflects a new,
noteworthy, niche or luxury brand.
This condition also suggests the brand
has more creativity than functionality.
High levels reinforce that the brand is
relevant and energized. It is a leader,
commanding high margins as well as volume.
The brand’s uniqueness has faded and
price or convenience become a dominant
reason to buy. The brand faces
commoditization. This opposite condition
indicates the brand is overloaded with
rational meaning and low on creativity.

Brand
Strength DE >R DE R DE >R
Examples: 100 Examples: 100 Examples:
100
iPhone Apple Applebee’s
80 80 80
Mini Disney Exxon
60 60 60
Red Bull Google Hanes
40 40 40
Gucci IKEA Midas
20 Wii 20 Nike 20 American Airlines
0 Zip Car 0 0 USPS
E E E
D REL D REL D REL

The brand is liked but not well-known. The brand is both well-known and The brand is better known than liked.
Consumers are curious, and there’s a well-regarded. It has become too familiar, and consumers
desire to find out more. The difference in are likely looking for better options.
the two pillars measures the real love The quantitative difference in these two
for the brand. pillars measures the distaste for the brand.
E >K E K E < K
Brand 100 Examples: 100 Examples: 100 Examples:
Stature Trader Joe’s Home Depot Spam
80 80 80
Coach VISA Slim-Fast
60 60 60
Product Red Coca-Cola TV Guide
40 40 40
Google Earth McDonald’s Yellow Pages
20 LG 20 Colgate 20 Budget
0 0 Ford 0 Rent-a-Car
EST KNO EST KNO EST KNO Days Inn

to (1) increases in current and future earnings, and (2) current
stock returns.2 Using this model, professors Jacobson and
Mizik produced compelling evidence that changes in brand
asset values affect stock market returns in two ways—one
“direct” and the other “indirect.” The indirect effect is on
current earnings. All else equal, companies whose brand
assets increase in value during a given period are likely to
experience higher-than-expected earnings during that period.
And to the extent the higher current earnings attributable to
branding also increase investors’ expectations of the firm’s
future earnings and cash flows, the increase in brand asset
values results “indirectly” in an increase in the company’s
market valuation. To illustrate, if brand-building alone is
assumed to increase a company’s EPS from $1.00 to $1.10
in a given year, and the stock has a P/E of 10, then brand is
assumed to have an “indirect” incremental effect on company
value of $1 per share (or $0.10 x 10).
At the same time, Jacobson and Mizik suggest that
effective branding can increase a company’s value “directly,”
or independently of any effect on current sales or earnings,
by reducing investors’ assessments of a company’s risk or
raising its expectations for future growth. For example, if
an increase in a company’s perceived brand value not only
increases current earnings to $1.10, but also causes investors
to raise the P/E multiple from 10 to 12, there is said to
be a “direct” effect of brand on value of $2.20 per share
($1.10 x (12 – 10).
Using BAV and Compustat data for the period
2000–2006, a more recent study by Jacobson and Mizik
supports, first of all, our earlier statement that the
explanatory power of valuation models can be increased
by including information about brand values along with
(unexpected) sales and earnings.3 And as we stated at the
beginning of this article, since only one-third of the effect of
brand assets on financial performance appears to be reflected
in current earnings, two-thirds of the financial impact of
brand assets on stock returns is information about future
performance. But perhaps even more telling, it was the
forward-looking Brand Strength metrics—the indicators
of Relevance and, to an even greater extent, Energized

2. Natalie Mizik and Robert Jacobson, “How Brand Attributes Drive Financial Perfor-
mance,” (2005), MSI Reports, Vol. 3, 21–39.
3. See Natalie Mizik and Robert Jacobson, “The Financial Value Impact of Perceptual
Brand Attributes,” Journal of Marketing Research, Vol. XLV (February 2008), 15–32.
Jacobson and Mizik attempt to isolate the effects of brand on a company’s value by re-
gressing its current-year stock on three main variables: the “unexpected” parts of both
the company’s current-year (1) sales (2) return on assets, and (3) changes in measures
of each of its major brand components (which vary depending on category). Each of
these three variables proved to have significant explanatory power, suggesting that the
brand asset measures provided “incremental” information over and above the informa-
tion provided by unexpected sales and returns. More specifically, their three-factor re-
gression model explained 65% of the variance in stock returns, with the financial vari-
ables metrics accounting for 77% of the “explained” variance, and the brand metrics
accounting for the other 23%.

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 81
Differentiation—that had the strongest correlation with
stock returns. Specifically, the brands that were the top
gainers in Energized Differentiation enjoyed an increase of
4.8% in the average risk-adjusted stock return one year after
the brand improvement, and the top ten losers experienced
a decline of 4.3% in the following year.4
The bottom line, then, is that changes in stock prices
and corporate values reflect not only financial performance,
but changes in brand metrics as well. And as this research
also shows, the explanatory power of brands (and brand
components) varies widely among different industries. To cite
one example—the case of financial services companies—64%
percent of the variance in stock returns is explained by a
regression that contains only current financial variables like
sales and earnings. But when brand metrics are included in the
model, the explanatory power of the model increases to 71%.
In the case of telecommunication companies, introduction
of the brand metrics variable provides an additional 19%
of explanatory power—and in the case of casual dining
companies, the incremental explanatory power is 18%.
On the basis of these and similar findings across a range
of other sectors, we conclude that brand indicators provide
information about stock returns that cannot be found in a
company’s financial statements.5
Putting the Metrics to Work
It may come as little surprise to most senior executives that
corporate branding efforts show up in stock prices. But how
can this knowledge be used by companies and their brand
managers to increase shareholder value?
One goal of corporate marketing is to create “leadership
brands” that aim to maximize brand value and, ultimately,
shareholder value. Our research suggests that the value of
a brand is maximized when two conditions are met: (1)
our measures of Brand Strength (which, again, combines
Energized Differentiation and Relevance) and Brand Stature
(Esteem and Knowledge) are both at their peaks; and (2)
Brand Strength is greater than Brand Stature.
To help illustrate this relationship, Figure 3 shows a
“PowerGrid” that positions a large number of well-known
brands along the two dimensions of Brand Strength and
Brand Stature. The figure places each brand in one of four
“quadrants,” with the upper right reserved for Leadership
brands. Starting at the lower left and moving clockwise, we
have:
• The New and Unfocused Quadrant: These brands
have little strength or stature, with low scores in all pillars.
Many are new to the market. Others are poorly defined,
middling brands that have lost their way.
• The Niche/Momentum Quadrant: With low earnings
4. See Natalie Mizik and Robert Jacobson, “Talk About Brand Strategy,” Harvard
Business Review, (October 2005) 1.
82 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
but high potential and pricing power, these brands have
Energized Differentiation and Relevance but only a small
audience.
• The Leadership/Mass Market Quadrant: These
brands have high earnings and margin power, and the greatest
potential to create future value. They’ve built both Brand
Strength and Stature. But when they slip below the diagonal,
their Stature exceeds their Strength, which is often a sign of
diminishing pricing power and future growth potential.
• The Erosion Quadrant: These brands are likely
becoming Commodities. Or they may be companies that do
not rely on their brands as a driver of their growth, such as
low-cost providers that create sales velocity at low margins.
Consumers may know these brands well but find them less
distinctive or relevant.
To provide some sense of how such brand differences
translate into value, the ratio of intangible value to sales for
Leadership brands is nearly twice that for Niche brands, and
more than double the ratios for Commodity brands.
Although this may not be clear from Figure 3, there is
continuous movement of brands among the four quadrants.
And the BAV is a flexible and fluid model that allows us to
identify clear patterns of growth, health, decay, or recovery
over time. By plotting such brand PowerGrids at repeated
intervals, we can track the evolution of a brand, identifying
the changes in relative value it experiences during its lifecycle
and designing different strategies for producing revenue and
profit during different brand phases.
As a general rule, Niche brands with more Strength
than Stature encourage trial by consumers without creating
loyalty, and so are generally run with the aim of maximizing
near-term return on capital. But for those brands that
develop into Leadership brands, managers are more likely
to succeed in achieving higher sales growth, margins,
and EBITDA—along with the higher growth and higher
valuation multiples. When their brands begin to decline into
Commodities, companies tend to increase dividends while
giving more thought to customer retention and possible
transactions.
These rules of thumb point to the importance of matching
brand and business development strategies. For example, if
you have a Leadership brand, make sure you provide enough
investment to allow the brand to expand; don’t starve it of
capital. But in the case of Commodity brands, harvesting
is likely to be the value-maximizing strategy. The biggest
mistake in such cases is to pour too much capital investment
into a saturated marketplace. When too many companies do
this, the result is a brand bubble.
After tracking the movements of over 2,500 brands on
the PowerGrid from 2001 to 2008, we concluded that most
5. See Natalie Mizik and Robert Jacobson, “Valuing Branded Businesses,” Journal of
Marketing Research, Vol. 75 (November 2009) 137-153.
Figure 3 BrandAsset Valuator PowerGrid

BrandAsset Consulting: 2009 First Half USA All Adults

Cirque du Leadership Coca-Cola

Soleil Dyson Trader Joe’s Pepsi-Cola
Sundance Barq’s Root Beer Starbucks
Jones Soda Toyota
Channel Snapple
David TiVo
Nutella Chevrolet
Yurman
Ralph Lauren
Pom Simply Orange Tide
iMac Dole
Naked Juice Dunkin’ Donuts
Tazo
Grape-Nuts
Orangina Oakley Gucci
Mass Market
DifferentiationE /Relevance)

Amy’s Joe Boxer

LinkedIn
Niche YMCA
Brand Strength

Nespresso Greenpeace Thomas’ English

Nature’s Own Muffins
Sunsweet
Jamba Juice Chef Boyardee
Lululemon
FUBU Boss/Hugo Ray-Ban Barbie
Method Polo Sport
Wonder Bread
Devon Energy Lee
Boss Buick
Yoplait Henkel Ronzoni

Nouriche Schweppes Palmolive

Mont Blanc
Voss American Girl
Route 66
No Nonsense Sun -Maid
Bazooka
New, Unknown or J. Crew
Unfocused Fanta Equal
Miller Coors Commodity or
Oxfam Balance Bar Eroded
Diners Club
Winston

Brand Stature
(Esteem /Knowledge)

brands experienced little change in Brand Strength in just
one year. On average, in one year, fewer than one in ten
brands show any positive movement—in fact, over 80% of
brands were essentially motionless. Even after five years, 74%
of brands showed no development. And that’s why the BAV
“brandscape,” as pictured in Figure 4, looks like a parking lot:
little movement, with the few brands that do move twice as
likely to fall as to go up. In the Niche quadrant, for example,
10% of brands moved into the Leadership quadrant, while
20% became Unfocused.
Increase Firm Value from the Brand Out
In 2008, as noted earlier, we found growing signs of a
brand “bubble.” When we used our BAV to identify the
best-performing brands (in terms of Brand Strength without
sacrificing Stature), we found a steadily shrinking number
of brands accounting for a disproportionate share of the
value being created. Consumers are reserving their devotion
and dollars for the truly special brands, leaving the rest to
fight for existence in a hostile terrain of promotion and
discounting.
The big question, of course, is what’s behind this
malaise. Why have consumers lost trust in, and respect
for, brands? The issues are complex, with a wide range of
factors dragging down brand perceptions among consumers.
Nevertheless, as we argue in our recent book,6 the main
problem can be summarized by three fundamental causes
that are working together to diminish consumer desire for
brands. Although none of these phenomena is entirely new,
they’ve never before operated at the same time or with such
intensity. These developments are taking a far greater toll
on brands than anyone had previously thought possible,
particularly set against the dramatic changes of a new digital
landscape.
The first major problem is excess capacity. The world
is overflowing with brands, and consumers are having a
difficult time assessing the differences among them. The
average supermarket today holds 30,000 different brands,

6. The Brand Bubble (Jossey-Bass, 2008), cited earlier.

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 83
Figure 4 Brands are Stuck in a Parking Lot

BrandAsset Consulting: 2001–2008 Full Year USA All Adults

13.9%
3.1%

79.6%
10.3%
Niche Leadership 7.8%

82.0%
68.3%
DifferentiationE /Relevance)

Mass market
Brand Strength

20.0%
9.7%

1.6%

8.5% 13.7%

86.9% 78.6%

New, Unknown or Commodity or Eroded

Unfocused

Brand Stature
(Esteem /Knowledge)

Percent of brands that gained Percent of brands that lost

Equity in 1 Year Equity in 1 Year

up threefold since 30 years ago. Globalization and increased
competition compound the number of new brands launched
every day. According to a Datamonitor report, 58,375 new
products were introduced worldwide in 2006, more than
double the number in 2002.
The second major problem is lack of creativity. In a
world with Hulu, Yelp, YouTube and Twitter, consumers are
continuously exposed to and able to share creative content.
The result of this democratization of creativity is that it has
raised the consumer’s “creativity quotient ” Consumers expect
more big ideas from brands, and they expect to get them
faster.
The final major problem with brands is loss of trust. Our
data shows that the amount of trust consumers place in a
brand today is a fraction of what it was ten years ago. In 1997,
more than half of all brands enjoyed high levels of consumer
trust. By 2008, consumers voted just over one-fifth of brands
as “trustworthy.”
So, how can brands build sustainable long-term value
to move companies back into alignment with Wall Street’s
valuations and the expectations that are driving them? How
can we predict the future brand leaders? Our BAV model
helps marketers focus on each component of the brand and
focus on building their brand for today and tomorrow.
Brand Rx: Energy
Let’s start by understanding how certain brand superstars—
Apple, Nike, Virgin and Google—continue to capture the
hearts, minds, and dollars of consumers. How are they
creating such wondrous relationships with consumers?
Answer: They inspire us with creativity, excitement, and
innovation. They’re not just different; they’re always working
at redefining their Differentiation, inventing new ways to
keep Differentiation vibrant. And thus our notion of brand
“Energy” was born.
Since the early 1980s, Professor Jacobson has been
finding evidence that analysts and investors pay attention
to a company’s marketing and brand measures when forming

84 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
their expectations for corporate profits.7 Backing up this
finding, the study also reported that changes in brand
attitudes can be useful in predicting future sales, earnings,
and stock prices.
More recently, in our collaborative work with professors
Jacobson and Mizik over the past decade, we began
to notice that consumers were focusing their enthusiasm
and purchasing power on an ever-smaller portfolio of
brands. We also began to compare brand attributes with
market performance, seeking to identify which combination
of variables best explained the changes in stock price
that could not be explained by fundamentals like sales
and earnings. What we found is that some brands were
constantly creating attitude change that was in turn
driving their financial numbers. They were creating brand
Energy, if you will.
Brands that currently have lots of Energy: Google,
Disney, Sirius XM, iPhone, Microsoft, Wii from Nintendo,
Microsoft, Pixar, Bluetooth, BlackBerry, iPod, Toyota
Prius. Analyzing our BAV data, we found that a brand with
Energy:
1. Has velocity and direction: The brand radiates
the sense that there’s more to it, which captures people’s
imagination. It hints at that next something.
2. Constantly reinvents itself: It is adventurous and
full of ideas, and brings innovation and surprise to the
marketplace.
3. Engages consumers: It is distinctive and authentic,
often with deep values and a point of view on the world
beyond profit-making.
4. Attracts without chasing: With its magnetism,
it draws people in without pandering or persuading. It
galvanizes consumers to join in.
5. Moves culture: The brand often becomes a catalyst
for change, a spark that fuels movements, mantras, social
networks, and communities.
It is not essential that consumers have all five of these
perceptions; one can be enough. But the more Energy a
brand has, the more powerful it becomes.
The data show that Energy is not a function of brand
maturity—in fact, many established brands have as much
energy as younger, flashier ones. Both McDonald’s and
WalMart, for example, are highly energized. Energy plays a
particularly powerful role in commoditized industries where
brands usually struggle to build attributes like loyalty. In the
airline sector, for example, the highest-energy brands include
Southwest, JetBlue, and Virgin Atlantic.
Energized Differentiation
But it’s not enough for brands just to have energy. They must
7. See David Aaker and Robert Jacobson “The Financial Information Content of Per-
ceived Quality,” Journal of Marketing Research, (1994), 31 (May), 191–201.
Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication
also provide a sense of “uniqueness,” a point of difference
that consumers don’t feel they can get elsewhere. Today’s
consumers are captivated by a certain property in successful
brands—a quality that reflects a more spirited, dynamic, and
creative experience. This goes far in explaining our earlier
observation that consumers are concentrating their passion
and purchasing power on an increasingly smaller portfolio
of special brands—brands with Energized Differentiation
that keep evolving. As already noted, we’re now able to
demonstrate the economic value of creativity in brands
and explain how brands can break out to affect the future
financial performance of their firms. Brands with Energized
Differentiation have connected better with consumers,
commanding greater usage, consideration, loyalty, and
pricing power.
Our research also shows that a renewed focus on Energized
Differentiation can reinvigorate even well-established brands.
In fact, it almost seems that consumers have short-term
memory—they are willing to discard past impressions and
see even a very familiar brand in new ways. We see this in
so-called “Lazarus” brands like Puma, Adidas, Converse,
Gucci, Coach, Burberry, Marks & Spencers, Izod, and
Cadillac. And then there’s Dove, which has lately elevated
itself from its simple product attribute focus (“one quarter
cleansing cream”) to engagement in a cultural conversation
with consumers about reframing societal perceptions of
beauty. Dove proves that the most ordinary objects can again
feel extraordinary.
Apart from consumer perceptions, we have also observed
that brands with higher levels of Energized Differentiation
and Relevance create more shareholder value. In 2001,
we started a hypothetical fund called “BEX Top 50”
hat has allowed us to track whether the stock market reflects
changes in consumer attitudes in our BAV data. We started
by investing a hypothetical $10,000 in each of the 50 brands
that posted the largest gains in Brand Strength at the
end of 2001, and have since adjusted the companies in the
fund every six months to stay current. When we compared
its returns to those of the S&P 500 through the midpoint
of 2009, we found we had outperformed the broad index
in 11 of the 16 periods. (For a plotting of the results, see
Figure 5.)
The Power of Irresistible Brands
In sum, we now know that the brands that are thriving even
in today’s difficult markets, and that will succeed in the
future, have a more powerful form of differentiation than
other brands. They are brands with Energy, brands that
offer consumers a palpable sense of movement. Brands with
Energized Differentiation drive future corporate financial
• Fall 2009 85
Figure 5 Brand Strength Fund Up 12% vs. S&P 500 Down 20%

$18,000
BEX Top 50 weighted Index
$17,000
S&P 500
$16,000

$15,000

$14,000

$13,000

$12,000

$11,000

$10,000

$9,000

$8,000

$7,000

$6,000

01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09
c- n- c- n- c- n- c- n- c- n- c- n- c- n- c- n-
De Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju

Data: BrandAsset Consulting: USA All Adults 2001–2009, Bloomberg

performance more than traditional brands that dominated
the market for decades.
One revealing exercise is to plot high-energy brands
against their category averages. Not surprisingly, some
brands have so much Energy that, as can be seen in Figure
6, they transcend their categories and redefine their own
market. The brand movements illustrated in this figure reflect
achievements that can be summarized in terms of multiples
of their category averages. To name a few,
• Dove has 1.6X the pricing power;
• Geico has 2.8X the momentum;
• Google has 2X the behavioral commitment;
• iPod has 2.5X the emotional commitment;
• Subway has 2.4X the usage and preference;
• Target has 2.3X the emotional commitment;
• W Hotels has 1.4X the category pricing power; and
• Whole Foods has 2X the category pricing power.
During the recent economic downturn, brands have
undergone even more of a shakeout. In a recession, brands are
more likely to move, but with increased risk of deterioration.
Our research shows that brands were both gaining and
falling at faster rates in the last quarter of 2008 and first
quarter of 2009 than in the corresponding quarters in the
three preceding years. Moreover, brands in the Niche and
Leadership quadrants have become statistically more volatile,
with the result that the probability that brands will drop
from either category has increased significantly. During the
current recession, Niche brands were almost twice as likely
to fall (to the “Unfocused” category) as they were during the
previous seven years.
We see similar challenges confronting brands in the “mass
market” area of the Leadership quadrant. During normal or
non-recessionary periods, our research shows that 82% of
the brands remain in the same space from one year to the
next, with 10% of brands declining and the remaining 8%
building brand strength. In contrast, during the last recession,
we saw 71% of brands occupying the same space after a year,
while 14% declined to Commodity status and 13% raised
their status.
As these last findings suggest, the current environment
may well be a great opportunity for many of the “Big Old
Brands” that have been languishing in the mass market
space for years. These Leadership brands need to follow
strategies similar to those pursued by Niche brands, but
with one addition: Leverage their established reputations
to renew and extend consumer interest. For example,
Johnson & Johnson’s Aveeno brand has scored high marks in
both Energized Differentiation and Relevance. Now is
the time for Aveeno to leverage that strength and capture
market share.
This all suggests it is an important time to continue
to build your brand. A more recent study by Professors
Mizik and Jacobson shows that corporate investments in
marketing and R&D during recessions can have significant
long-term payoffs. The study reported that, during the period
1989–2005, companies with operating income that continued
to invest during a downturn had excess stock returns over the
next five years that were four times the returns of companies
that simply cut costs. And even companies with net operating
losses that managed to invest in their future saw excess stock

86 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
Figure 6 Brands with Energy Break Out of Their Category

BrandAsset Consulting: 2008 Full Year USA All Adults

iPod Google
Target
Subway

Dove

Whole
Foods
Axe
Consumer Electronics
DifferentiationE/ Relevance)

Fast Food
W Hotels
Brand Strength

Retailers Soaps
Internet Search

Deodorants

Geico
Supermarkets

Hotels

Insurance

returns that were twice as high as those companies that did
not invest.8
To help companies make efficient brand-building
investments, we looked at the components of those changes
for both the Niche and Leadership brands. We found that
while Energized Differentiation is still the most important
component, both Relevance and Esteem have become more
important in driving change during a recession. How should
companies address this challenge?
In the current environment, winning brands will deliver
on fundamental needs while also satisfying higher-level
wants. By focusing on basic needs, companies will be able
to build current sales. Relevance measures how well that
brand addresses basic needs: Is the product durable? A good
value? Do I get my money’s worth? Higher-level desires are
addressed through Energized Differentiation: Is the brand
innovative? Does the consumer feel stylish or glamorous? Is
this brand a leader or progressive in some way?
Six strategies can help carry brands though a recession
and capitalize on newly arising opportunities:
• Build on lasting value with new service or trends.
8. Natalie Mizik and Robert Jacobson, “Marketing Strategies Across Economic Condi-
tions,” Columbia University Working Paper, 2009.
• Prove your brand is an enduring advocate.
• Make it easy for consumers to take care of themselves.
• Couple chic with wallet-friendliness and lasting
quality.
• Offer accessible and guilt-free indulgences.
• Help consumers make the most of today and be more
optimistic about tomorrow.
Not all strategies will be appropriate for all categories or
brands. As an example, financial services companies that have
seen consumers lose trust and confidence in their brands need
to work on proving they are durable but still innovative. The
most promising strategies in such cases are those designed
to accomplish the following: Prove your brand has enduring
value by showing the brand is authentic, durable, trustworthy,
and straightforward, but also progressive, intelligent, and
a leader.
Brands must continue to invest in Energized
Differentiation while also building Relevance and Esteem
to move toward a Leadership position. If a brand shows high
Relevance, and still demonstrates Energized Differentiation,
it will be well-positioned to come out of the recession. Not

Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009 87
Figure 7 Brands are More Mobile in the Recession

BrandAsset Consulting: 2001–2009 USA All Adults

Recession

7.0%

Niche Leadership
13.1%

56% 71%
DifferentiationE /Relevance)

Mass Market
Brand Strength

36.3% 14.3%

New, Unknown or Commodity or Eroded

Unfocused

Brand Stature
(Esteem /Knowledge)

Percent of brands that gained Percent of brands that lost

Equity in Recession Period Equity in Recession Period

only does it address needs that will result in current sales, but
its Energized Differentiation will help drive future value by
meeting higher-level desires.
What Can Marketers Do?
Managers should focus on building an irresistible brand and
infusing it with energy. Since brands, like businesses, are
in permanent flux, brand managers must view their job as
one of constant reshaping and renewal. They must listen
carefully to the market, and continuously modify, personalize,
share, and improve upon their offerings. Especially in
today’s economic environment, the benefits consumers
are looking for in brands are changing. By being keenly
aware of these shifts in consumer perception and values,
marketers can help their brands survive, prosper, and drive
shareholder value.
john gerzema is Chief Insights Officer for the Young & Rubicam Group.
One of the early founders of account planning in American advertising,
John has guided brand strategies for global businesses to creative acclaim.
Before joining Y&R, John ran Fallon’s international network.
ed lebar is CEO of Brand Asset Consulting, a division of Y&R, and
one of the early architects of the BrandAsset® Valuator. Ed is a 35-year
veteran of Young & Rubicam and a former professor of the City College
of New York.
anne rivers is SVP, Director of Brand Strategy, at BrandAsset®
Consulting. Anne was an investment banker at Bear Stearns as well as
director of marketing, development and corporate finance at several retail
and consumer product companies.

88 Journal of Applied Corporate Finance • Volume 21 Number 4 A Morgan Stanley Publication • Fall 2009
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