Portfolio power: harnessing a group of brands to drive profitable growth

The Authors

Andrew Pierce, Vice President of Mercer Management Consulting, Andrew Pierce is based in Boston
and Hanna Moukanas is based in Paris. He can be reached at andrew.pierce@mercermc.com

Hanna Moukanas, Vice President of Mercer Management Consulting, Hanna Moukanas is based in
Paris. She can be reached at hanna.moukanas@mercermc.com

Abstract

Brand portfolio management is not just a marketing issue, in which a sub-optimal portfolio dilutes marketing
messages and confuses customers. It also directly affects corporate profitability. Ill-defined and overlapping
brands in a portfolio lead to erosion in price premiums, weaker manufacturing economies, and sub-scale
distribution. In a slower economy, the problems of an under performing portfolio are even more acute: While
adding brands is easy, it becomes difficult to harvest the value in a brand or to divest it. Effective brand portfolio
management starts by creating a fact base about the equity in each brand and the brand’s economic
contribution. The application of analytical tools can inform decisions about individual and collective brand
strategies from targeting and positioning to investments, partnerships, and extension opportunities. Linking the
intangibles of brands to hard financial metrics allows companies to exploit the full potential of their brands and
thereby gain a competitive advantage.

Article Type:

Technical paper

Keyword(s):

Brand valuation; Growth; Portfolio planning; Brand image; Brand identity; Brand names.

Journal:

Strategy & Leadership

Volume:

30

Number:

Year:

2002

pp:

15-21

Copyright ©
 MCB UP Ltd

ISSN:

1087-8572

Brand portfolio management is not just a marketing management issue, in which a sub-optimal portfolio dilutes
marketing messages and confuses customers. It is also an expression of corporate strategy that directly affects
corporate profitability. Ill-defined and overlapping brands in a portfolio lead to erosion in price premiums,
weaker manufacturing economies, and sub-scale distribution. In a slower economy, the problems of an under
performing portfolio are even more acute: while adding brands is easy, it becomes difficult to harvest the value
in a brand or to divest it.

Effective brand portfolio management starts by creating a fact base about the equity in each brand and the
brand’s economic contribution. The application of analytical tools can inform decisions about individual and
collective brand strategies from targeting and positioning to investments, partnerships, and extension
opportunities. Linking the intangibles of brands to hard financial metrics allows companies to exploit the full
potential of their brands and thereby gain a competitive advantage.

The brand portfolios of many companies are remarkable for their gaps, redundancies, poor focus, and lack of
logic. For one cause, the surge of mergers and acquisitions in the 1990s has muddled many corporate brand
strategies. Inside these newly merged firms, divisions are often left to fight for resources for their multiple
competing brands. In the recent consolidation in the auto industry, for example, General Motors added Saab,
Alfa Romeo, and Hummer to its large stable of nameplates, and Ford bought Volvo, Range Rover, and Fiat.
Now both companies face wrenching and potentially expensive choices about which of these brands should be
nurtured and which should be harvested or shut down.

At the corporate brand level, executives tend toward creating “master” brands. Many large industrial companies
such as Asea Brown Boveri, Alstom, and Textron operate this way and tuck newly acquired companies under
the master brand umbrella. Doing so, however, often stunts the growth of some highly differentiated brands
within a portfolio. And it puts undue pressure on the master brand to be relevant while covering more market
territory.

At the product level, brand managers looking to drive incremental market share growth often attempt to
broaden their brand positions and target new customers. This creates overlap with other brands in the portfolio,
confusing customers and weakening the company’s value propositions. Even the best category managers have
struggled to find the right balance among products, individual brands, and category brands.

In either case, merger-induced brand overload is just one aspect of the problem. At most large companies,
executives fail to make the distinction between rationalizing products and rationalizing brands. And they rarely
make careful calculations about how brand decisions link to other economic levers of the business such as
pricing policies or manufacturing scale and distribution strategies.

To be sure, brand management has advanced since the days when brands were tag lines managed by
marketing executives and built by spending money on general advertising. Senior executives today understand
that brands are intangible assets that can be leveraged to build or protect shareholder value. But executives
are often at a loss to understand their brands’ equity (the attributes of a brand that influence customer
behavior) and the synergies that exist among brands in a portfolio. They are uncertain about how to determine
which sequence of brand portfolio moves will be most effective in generating an attractive ROI.

Senior executives are struggling with several questions:

• Can we remove a brand from the portfolio without losing disproportionate franchise share or
profitability? GM is planning to shut down Oldsmobile, Ford is considering shuttering Mercury, and
DaimlerChrysler is planning to shut down Plymouth. It will become clear over the next few years which
firm will benefit most from these moves. Such moves do carry a risk: in the early 1990s, Miller removed
 the Miller High Life beer brand from the premium category and put it in the below-premium category.
After an initial bump in volume, Miller has continued to lose market share.
• Can we successfully reposition a brand, as IBM has done with e-business services, or is it more cost-
effective to launch a new brand to reach a new customer set? Whirlpool, after acquiring Philips’ large-
appliances business, has built strong brand equity in Europe in less than five years. More recently,
Philip Morris said it was changing its corporate name to the Altria Group, placing a big bet that the new
brand will overcome the deficiencies of its predecessor.
• Can a brand in the portfolio propel us into new markets with an advantage over competitors? Kodak
has experimented with licensing its brand to toy makers. Now McDonald’s is betting that its brand will
extend to its Golden Arches hotels in Switzerland.
• Which brands in the portfolio should be global and which regional or local? Philip Morris’s tobacco
business is trying to sort out which brands should stand alongside Marlboro on a global basis.
Electrolux, meanwhile, is searching for the best mix of global and regional brands.
• Should some brands in the portfolio be used as a firewall to protect other brands? The Swatch Group
has used its Swatch watches successfully to protect the highly profitable Omega and Rado brands
from encroachment by competitors.
• Should brands in the portfolio be used to exploit channel opportunities? John Deere is re-branding its
consumer tractors under the Scott’s brand for distribution through Home Depot in order to minimize
channel conflict.

These questions go well beyond issues of marketing. As brands within a portfolio overlap and lose their
differentiation, the economics of the business can be severely affected. Pricing power erodes and discounting
increases, creating a vicious cycle of more promotions that accelerates the decline of brand equity. Product
developers then add new features that they hope will differentiate the product and fulfill the promise of the
brand. Sales channels become flooded with too many products and too few resources to promote any given
brand. Ultimately, profits suffer and the firm continues to starve all of the brands in the portfolio (Exhibit 1).

Effective brand portfolio management demands a more selective approach to cuts and investments. It also
requires that managers explicitly model the implications of brand portfolio moves on key economic measures,
including market share, price premiums, scale economies, and other financial variables. Only when the link is
made between intangibles and hard benefits can companies exploit the full potential of their brands.

Managers who want to manage their portfolio to drive profitable growth should follow four precepts.

1. Align the brand portfolio with business designs

Successful brand portfolio managers embed branding decisions into each aspect of the company’s business
design, from customer selection to the internal organizational system (Exhibit 2). They use divisional or
business unit brands as part of creating and protecting unique business designs within the company. At the
same time, they recognize the need to minimize the complexity and cost in managing a portfolio.

Balancing these competing goals is not easy. The simplicity and low cost of a single master brand may not be
the right model if it suppresses powerful sub-brands. The right mix will depend on the distinctiveness of the
various business designs in the company portfolio, the organization’s ability to manage separate brands, and
the willingness of senior management to fund and support a portfolio of brands. Where there is a distinct set of
customers being served with a distinct set of products, often through distinct channels, a separate brand may
be the most effective choice.

The evolution of brand strategy within Citigroup over the past few years illustrates how a company can sort
through its brands and make sure they are aligned with the business designs in order to drive profitable growth.

When Citibank merged with Travelers Group to form Citigroup in 1998, brand portfolio issues came to a head.
Travelers, under CEO Sanford Weill, owned a suite of independent businesses, including Primerica, Salomon
Brothers, and Smith Barney. Citicorp had many brands as well, and CEO John Reed was trying to winnow
them down to a Citi master brand.
However, when Weill became CEO of Citigroup in 2000, he revisited Reed’s vision of creating a single master
brand and instead began to explore a portfolio approach. Citigroup’s overall corporate strategy at that time was
clear: to develop and manage a portfolio of strong, autonomous, global businesses across the spectrum of
financial service products. While minimizing cost when possible, companies should use brands to protect
profits against encroachment by competitors (as in credit cards and asset management); to support distinct
business designs (like Primerica); and to create powerful products that can be distributed through the Citi
network (Smith Barney funds).

To support the strategy, Weill posed a series of brand-related questions to his senior managers: what happens
when strong brands in the USA, such as Travelers and Salomon Smith Barney, have no brand equity abroad?
How should a brand be handled if it targets distinctly different customer segments around the world, as Citibank
did? Does the portfolio need to be the same globally, or can there be distinctions by geography? And what is
the right portfolio strategy for emerging markets?

Extensive research at Citigroup revealed how customers and prospective customers globally perceived the
various brands’ differentiation, relevance, and category fit. Using that research as a fact base, Weill and his
team came to understand that Primerica and Travelers were strong brands with positive brand equity in the
USA. They warranted their own brands to represent stand alone businesses. Travelers would not be extended
outside the USA, and Primerica would not be renamed as a brand under the “Citi” umbrella.

In Citigroup’s consumer businesses, there was significant overlap in credit cards, consumer lending, asset
management, and private banking. So management decided to create clear boundaries among brands targeted
to distinct consumer segments with unique value propositions. Thus, Citibank Private Bank was re-branded to
become Citigroup Private Bank, tying its image closer to the investment bank. This also allowed the retail
brokerage, renamed Smith Barney, to have a more distinctive brand that draws on its heritage. In addition,
product-branding guidelines were set to minimize brand proliferation, and a newly established head of brand
management would oversee the brand process.

The last opportunity was in the investment banking market. Analysis showed that Salomon Smith Barney was
not viewed as a top-tier investment bank, so it would be phased out over time. Likewise, the Citibank brand,
which had strong equity in traditional commercial lending, was not powerful enough to stretch to key investment
banking services. The more effective approach was to leverage Citigroup as the “power” brand in corporate
lending and investment banking, which also signaled to the capital markets the importance of those businesses
to the portfolio.

While Weill is well known for being financially savvy, he also realizes the benefits of managing a portfolio rather
than moving to a single master brand across all businesses. For example, emphasizing a portfolio of stand-
alone brands allows Citigroup to continue its success as a dealmaker, as evidenced with the most recent
spinout of the Travelers Property & Casualty business. Such deals would be much more difficult if the brands
were linked to the Citi name.

2. Consider building the pyramid

Most large companies manage their brand portfolios as a disparate collection of individual brands. By doing so,
they blur the boundaries between each brand and diminish their differentiation.

Many consumer packaged goods categories, such as ice cream, for example, range from “value-priced”
private-label store brands at about $1.50 per pound to the luxury brands such as Godiva at more than $8 per
pound. Very few companies offer a brand at each price point in their respective pyramids, and they are,
therefore, limited in how they can use branding to their advantage.

Individual brands within a portfolio become far more powerful when they are interrelated, as Kraft Foods has
demonstrated. During the 1990s, Kraft built a pyramid of brands to revitalize the flagging market for home-
cooked pizzas. Kraft’s managers saw that customers’ increased exposure to fresh pizza in upscale restaurants
had opened the door to more sophisticated offerings for the home market. At the same time, Kraft recognized
that the polarization of household incomes was creating new opportunities at both the high and low ends of the
market.

Over the course of six years, Kraft expanded beyond its staple Original Tombstone pizza product. In 1992, it
added Jack’s, aimed at value-seeking families, with bite-sized, roll, and snack varieties. In 1995, it introduced
DiGiorno pizza with a rising crust, a make-it-at-home product aimed at adults accustomed to eating pizza in
restaurants or from takeout. Finally, in 1998, it addressed the high end of the market with California Pizza
Kitchen, at three times the price per pound of its lower-end offerings (Exhibit 3).

Kraft’s approach was incredibly successful. The introduction of DiGiorno lifted its pizza sales by 20 percent
annually, and it now controls more than 40 percent of the home-baked pizza market. Indeed, Kraft’s moves
raised total category demand by more than 10 percent.

Kraft’s success depended on a coordinated, holistic portfolio strategy in which each brand could be tailored for
a distinct level of the pyramid. Without this discipline, each brand manager would have been motivated to push
into neighboring segments, blurring the boundaries between brands and giving an opportunity to more focused
competitors.

The product pyramid model requires constant vigilance and defense against attacks at its base. Low-cost
manufacturers are continually trying to gain market share in entry-level products through aggressive pricing.
Once they do win market share, such competitors can build distribution strength, which they leverage to enter
the next level of the pyramid. Incumbents, meanwhile, often fail to react to such incursions in a timely and
effective manner. As sales decline at the low end, incumbents tend to allocate more fixed costs to the higher
levels of the pyramid, making those products less competitive and more vulnerable to further attacks. This
pattern has played out in numerous industries, most prominently with the rise of Japanese and Korean auto
manufacturers since the 1970s.

The best response to these attacks is an effective firewall strategy. In practice, this means that rather than
allocating a “fair share” of fixed costs to entry-level products, companies should consider using economic
measures that reflect incremental costs, allowing the higher levels of the pyramid to cover the core costs. The
base of the pyramid should be managed as a low-cost business design, with production eventually moved to
low-cost countries.

3. Grow winners and harvest losers

Adding brands to a portfolio can be an important part of pushing deeper into existing markets or extending into
new categories. But in a slower economy, companies are finding they have to concentrate investments on a
smaller group of power brands if they are going to be successful. These are generally leading brands that
command a price premium, have an edge in distribution, global scale, or another critical advantage, and thus
have the greatest opportunities for profit growth (Exhibit 4).

Unilever, a pioneer in brand management in consumer packaged goods, decided to take this tack in 1999. Niall
Fitzgerald, Unilever’s co-chairman, explained: “We dissipate our energy and resources on far too many brands.
We currently have around 1,600 brands, between 5,000 and 10,000 stock-keeping units per business group,
and fragmented delivery systems to our customers.” So Unilever decided that it would prune its stable of
brands and focus its $6 billion advertising and promotions budget on roughly 400 power brands.

These power brands, such as Cif cleaning products and Dove, share several characteristics. They have
significant customer loyalty and, typically, the leading market share. Their brand equities are highly
differentiated and can stretch into related categories. However, they have been under-exploited in terms of
category and geographic expansion (Exhibit 5).

Dove, for example, originally was a moisturizing soap. Unilever then harnessed Dove’s brand power to expand
from 13 countries to 75 over the past decade, with sales more than doubling to $800 million. In the USA alone,
Dove bar soap sales grew 34 percent from 1997 to 2000, while overall sales in that category were flat.
 Unilever has also exploited consumers’ favorable perceptions of Dove as a skincare product to introduce a
Dove underarm deodorant. By virtue of its brand family connections, Dove deodorant generated $79 million
during its first year in the USA, a 4.7 percent market share equal to the established Old Spice brand of Procter
& Gamble.

Secondary brands, meanwhile, will be sold, eliminated, or transferred to a power brand in a neighboring
category, Thus Groom & Clean, a $4 million hair gel brand used by older men, has been converted to Suave, a
master brand for shampoo.

Unilever supports its power brands with its best management talent and by investing in expanded distribution,
increased advertising and marketing, and enhanced product development efforts. By being rigorous about
cutting or repositioning weak brands, Unilever can afford to devote more resources to those that promise
superior growth.

4. Play the cards you are dealt

Many companies in search of growth try to extend brands in their portfolios to adjacent markets or entirely new
markets. That can lead to expensive mistakes, as Starbucks learned when it tried to sell branded furniture.
Rather than stretching a brand so far that it snaps, the more effective tack can be to build a new brand or buy a
brand.

Marriott International has excelled at this discipline with its 2,100 lodging properties in almost 60 countries.
While the lodging industry grew at less than 6 percent annually during 1990s, Marriott’s growth rate exceeded
10 percent. Similarly, the company’s profitability showed an 18.4 percent growth rate, three points higher than
the industry as a whole.

Many factors have contributed to Marriott’s success, including sophisticated revenue management and
centralization of many common processes such as purchasing. But Marriott’s managers have also developed a
clear understanding of where they can and cannot take the brand.

During the early 1980s, the economy hotel category was populated by regional brands with which many
customers were unfamiliar. Marriott saw an opportunity to introduce a unique and appealing hotel format
dubbed “Courtyard by Marriott.” The standards associated with Marriott enticed travelers concerned about the
quality of unknown local chains. Since its introduction in 1985, Courtyard by Marriott has come to dominate the
select-service economy segment, with more than 500 properties in the USA.

At the upper end of the lodging spectrum, however, Marriott realized that its brand could not attract affluent
clientele. So in 1995, it acquired the Ritz-Carlton chain of 31 properties, which had a lackluster financial
performance but a burnished image among affluent customers.

Over the next five years, Marriott added eight distinct lodging brands to its four core brands. Some, such as
TownePlace Suites by Marriott, are linked through their identity to the core brand, while others, such as Ritz-
Carlton, are not.

Marriott was able to realize value from the brand acquisitions by applying its operating expertise to improve
financial performance and using its considerable free cash flow to fund international expansion. Moreover,
Marriott has leveraged the existing strong equities in each brand. As Horst Schulze, president of Ritz-Carlton,
said after the acquisition, “Marriott [understands] our customer is a global traveling customer, and that meshed
totally with our vision.”

Implications for skills and the organization

Fact-based insights, grounded in an understanding of both brand equity and a brand’s economic contribution to
corporate profitability, form the foundation for a winning brand portfolio. Then the organization must act on
those insights, with everyone behaving in ways that advance the cause of the whole portfolio, not just of
individual brands.
 Brand decisions typically are decentralized and ad hoc. The birth of a new product or technology usually
spawns the desire to build a new brand. Companies that commit to a portfolio approach, like Citigroup, will
counter this tendency by establishing a brand management function and brand management guidelines that
outline when, how, and where a brand should be used. They will also reward managers for making decisions
that benefit the entire portfolio, rather than for building one brand at the expense of another. Thus, DuPont has
realized that using separate salespeople and channels to sell its trademarked Tyvek, Stainmaster, and Corian
products to the same contractor may not be as effective as using an integrated sales approach.

Finally, smart brand portfolio managers will make peace with their marketing colleagues. In recent years,
marketing has increasingly focused on demand generation to drive sales of more products, whereas branding
efforts have focused on longer-term image building. The two are often at cross-purposes: PC manufacturers,
for instance, have been known to allocate as much as 70 percent of their marketing budgets to promotions, at
the expense of brand building. Smart brand portfolio management coordinates these two functions, allowing the
organization to operate more efficiently and use brands to drive sustained value growth.

Exhibit 1 –-The downward spiral of competing brands

Exhibit 2 –-Aligning brands with business designs

Exhibit 3 –-Kraft builds a pizza pyramid

Exhibit 4 –-Category-leading brands drive financial performance
 Exhibit 5 –-Unilever rationalizes its personal care brands

© Emerald Group Publishing Limited | Copyright info | Site Policies

..