A VIRTUOUS CYCLE:
    Key Findings for Policy-Makers and Chief Executives

                                Lead Editor

                             Kamran Kashani
  Professor of Marketing and Global Strategy at IMD, Lausanne, Switzerland

                           Authors of the Report

                             Kamran Kashani
  Professor of Marketing and Global Strategy at IMD, Lausanne, Switzerland

                               Joyce Miller
             Research Associate at IMD, Lausanne, Switzerland

                               Tony Clayton
                 Director at PIMS Associates, London, UK

AIM, IMD, and PIMS wish to thank over 100 managers in the following companies
for their co-operation in this research, and for their insights on brand-building and the
innovation process as detailed in the case studies that appear in this Report.

                                      Abba Seafood
                                       Antonio Puig
                                      Beiersdorf AG
                                    Bitburger Brauerei
                                      Bristol Myers
                                   Cadbury Schweppes
                                    Campina Melkunie
                                     Douwe Egberts
                                        Fort James
                                        ICI Paints
                                     Kimberly Clark
                                      McCain Foods
                                    Procter & Gamble
                                      Pernod Ricard
                                     Philips Lighting
                                    Reckitt & Colman
                                         Sara Lee
                                      SCA Hygiene
                                   Smiths Foods Group
                                     Unilever Foods
                                     Unilever HPCE
                                    Waterford Crystal
                                        Wella AG

       A full Report on the survey findings, including 22 detailed case studies,
                           is available directly from AIM.
                                                                                page 1


This document summarises the findings of a massive research project examining the
role of innovation and its contribution to the performance of brands. It contains
important findings and conclusions for practitioners, both those in the business of
building brands and others, including public policy-makers, whose decisions impact
the health of brands and consumer choice.
The data presented here has been gathered through 100 in-depth interviews with
mostly fast-moving consumer goods (fmcg) companies across Europe. The overall
study--designed in joint effort between IMD (the Swiss-based International Institute
for Management Development) and PIMS Europe (Profit Impact of Market Strategy)
analysed sixty innovations--primarily new product introductions--launched by 34
companies across 26 product categories. In addition, some evidence is drawn from
PIMS‟ 1998 study of branding and business growth, supplemented by further
interrogation of PIMS‟ fmcg database during 1999 specifically for this new study.
Our research confirms that in the highly contested consumer markets covered by this
study, surveyed companies place innovation among their highest strategic priorities.
Innovations that create and deliver added consumer value contribute significantly to
the success of brands. Moreover, this study demonstrates that innovation, consumer
value creation, and communication are all elements of a virtuous cycle of brand-
building. At each turn of the cycle, innovative brands create more consumer value,
thereby earning greater consumer franchise, which, in turn, translates into growth in
sales and market share, higher savings in communication expenditure, and greater
returns on investment. With greater returns come the added resources for further
innovation and, thus, the cycle repeats itself.
Our study also demonstrates that the virtuous cycle of value innovation can also shift
into a vicious cycle if changing management priorities, or other factors including
misguided public policies, interrupt a continuing innovation process. Under this
scenario, the immediate loss of innovation advantage leads to reduced consumer value
and franchise which, in turn, results in poor market performance, declining returns
and, ultimately, reduced resources for future innovation. Staying in the innovation
race and continuing to invest in enhancing consumer value relative to competitive
offers are thus key imperatives for brand-builders.
                                                                                page 2

Strong brands are built not on the back of advertising and other promotional
expenditures but rather on innovations that create novel consumer value.

Evidence shows that growth in brand sales and market share is related to
innovations that lead to significant improvements in consumer value. At the same
time, high advertising and promotional expenditure in the absence of initial
consumer preference has a negative impact on market share and return on

Innovation remains a key strategic priority for branded goods companies,
with a significant majority of those surveyed pointing to its growing

The high and rising priority given to innovation is related to management concerns
about low growth in highly competitive markets where product differentiation is
minimal or non-existent. Innovation promises growth through differentiation.

Radical product innovations that create a significant improvement in
consumer value offer higher brand growth in both market share and sales
than minor incremental innovations.

While many of the surveyed companies are busy with incremental innovations, our
study points to the potential of product “breakthroughs” for significant competitive
gains. Brands that “innovate” a whole new category, or set decidedly superior
standards in consumer value, are rewarded with faster growth.

Pioneering brands enjoy lasting benefits associated with the first-mover

Our study confirms that brands that have pioneered a new category through radical
innovation have far greater probability than latecomers of enjoying market
leadership for several subsequent years. This lingering advantage is a reward for
the higher risks associated with such breakthrough innovations.

Small wins through incremental product innovations can lead to sales and
market share growth provided a brand is more active than its rivals in
introducing new products and/or such innovations represent perceptible
improvements in consumer value.

Incremental product enhancements have their place in a brand’s innovation policy.
The key factors have to do with the total effort relative to competition, and the
impact on perceived consumer value. The greater these two factors, the more
significant the impact of incremental innovations.

An early focus on consumer value is another key success factor for

Brands that focus on consumer value enhancement at the initial stage of concept
development achieve over twice the growth of those that do not. Early assessment
of consumer value leads to insights that help put the rest of the innovation process
on track.
                                                                                                           page 3

                                         Highlights continued
    Speed to market is a factor in brand performance as measured by growth in
    both sales and market share.

    Brands that bring innovations to market within the first 12 months from the original
    idea show far greater growth in both sales and market share than brands whose
    innovations take longer to reach the market. It pays to be fast because it pays to be

    Brands are in a continuous race for “innovation advantage”. Brands that pull
    ahead of their rivals in relative innovation usually gain sales and market
    share; those that fall behind can lose on both fronts.

    The innovation advantage is even more critical for brand leaders. Staying ahead of
    competition in new products safeguards their category leadership. On the other
    hand, leaders pay a heavy penalty in market share loss by falling behind in the
    innovation race.

    When innovating brands create novel consumer value, they benefit from a
    number of advantages that come with greater consumer franchise, growth,
    and economies of scale in communication. As such, innovating brands
    participate in a virtuous cycle with the following logic and characteristics:
           Brands that, over time, achieve a leading market share position for their
           record of innovation and significant consumer value creation are further
           rewarded by strong consumer franchise, which, in turn, translates into
           the phenomenon of having to spend less on brand communication than
           their less innovative rivals.
           Innovating brands that have achieved a relative advantage over their
           rivals in consumer franchise enjoy the added benefit of a greater return
           on their investment--a benefit, in part, associated with the greater
           economies of scale.
           Innovating brands enjoying higher returns, and the resulting brand
           equity, have greater incentives and resources to invest in further
           innovation, thereby perpetuating the “virtuous cycle”.

    A virtuous cycle can easily turn into a vicious cycle if shifting priorities,
    mismanagement, or misguided public policy interrupt the continuing
    innovation process.

    There are no fixed positions in the race for innovation advantage. Challengers do
    displace brand leaders on the basis of their record of innovation and creating
    consumer value. The loss of innovation advantage can lead to reduced market
    performance and declining economic returns, which, in turn, diminish the resources
    available for future innovation. In today’s highly competitive markets, staying in the
    innovation race is not a choice but an imperative.

Each of the above findings is further elaborated in the rest of this document and
illustrated with appropriate examples from the surveyed companies. 1
    To avoid unnecessary confusion and in the interest of clarity, a number of terms used throughout this document
    are defined in the Appendix.
                                                                                                                             page 4

                                                     KEY FINDINGS

Innovation: A Strategic Priority
Innovation, mostly in the form of product enhancement, is a top priority for
management in the fast-moving consumer goods (fmcg) sector. A main strategic
priority for two thirds of companies over the last two years, innovation is expected to
receive an even greater priority in future (see Figure 1).

                                                              Figure 1
                                       Innovation Gets High Score as a
                                           Main Strategic Priority
                         Past 2 years                                                Next 2 years
                             O the r
                                                                                     O the r
          C ost R e duc tion                                                         16%
                 6%                                                           EC R
                                            Inc re m e ntal                   5%
             C om ple xity
                 6%                          Innovation              N e w B rands
                                                46%                       3%                          Inc re m e ntal
             N e w B rands                                                                             Innovation
                  9%                                                                                      54%
                                                                            R adic al
                         R adic al

                                                                                               Source: PIMS / IMD
                                                                                               Brand Innovation Study 1999

In the highly competitive markets of branded fmcg, lack of innovation often translates
not only into rapid loss of differentiation but also commoditisation, both of which
mean declining margins and profitability. For this reason, continuous innovation has
been elevated to a management imperative for many organisations.
Improving Consumer Value: A Key Driver
Innovations that create and deliver added consumer value contribute significantly to
the success of brands. Figure 2 shows that significant growth in both market share
and sales has come to brands that have shown large improvements in consumer value
through innovation. Brands that have failed to demonstrate any change in consumer
value show the least growth in both sales and market share.

                                                              Figure 2
                                                                                                page 5

Innovations focused on improving consumer value reap the rewards.
 Incorporating three years of technical effort and consumer research, Fort James‟ Thirst Pockets
  was engineered to improve both absorption and wet strength--performance aspects highly valued
  by consumers. This new patented format was a visible change from the standard kitchen towel.
  The introduction of Thirst Pockets, first in premium patterned towels, then in plain products, led to
  a shift in consumer buying patterns, stimulating innovation and growth across the entire category.
 Beiersdorf achieved significant growth in both sales and market share of its face care products
  with the 1998 introduction of Visage Q10, a skin care cream containing a human coenzyme that
  induces cellular changes to reduce wrinkles while smoothing and strengthening facial skin.
  Beiersdorf‟s own sales value in the segment rose by 85% between 1997 and 1999, increasing its
  share of the German face cream market from 16% to 18%. During the same period the overall
  market for face care products in Germany was growing, due, at least in part, to the emergence of
  the new Q10 value proposition.

Radical and Incremental Innovations
Innovation covers a broad spectrum of activities--ranging from incremental moves
that offer marginal gains or additional choices to existing users, all the way through to
radical steps involving the creation of new categories and markets, the introduction of
new generations of products, and/or major changes in product performance that lead
to significant changes in consumer behaviour.

Radical innovation changes the way consumers perceive and use products.
 According to Procter & Gamble‟s Chris Start, VP Global Strategic Planning and Design in the
  Homecare Division, " 'Real innovation' improves and/or simplifies consumers' lives in a
  meaningful way. Anything less than this is a minor change, which may be a worthwhile
  improvement in itself, but it does not fundamentally alter the consumer's view of the product."
 With the commercialisation of the Nespresso System in 1987, Nestlé created a completely new
  category for portion coffee. Eight varieties of roast and ground coffee packaged in individually-
  portioned aluminium capsules were created for exclusive use in the Nespresso machine. This
  capsule-machine combination offers consumers a refined quality and individualised cup of
  espresso coffee with speed and convenience at the push of a button. While smaller rivals have
  since entered the market with lower-priced, lower-quality systems, Nespresso still dominates the
  household segment of the fast-growing portion coffee market with a 90% share. The technical
  complexity of the Nespresso System and related patents have proven to be major barriers to entry
  by other established players in the coffee market.

While many of the sampled companies are focusing on incremental innovation aimed
at growing existing brands and/or stretching brand values through product
revitalisation (see Figure 3), our data shows that radical innovations have a far greater
potential to increase market share and enhance sales growth than do incremental
innovations. In other words, strong brand performance is, more often than not, the
reward for “breakthrough” innovation.
                                                                                                    page 6

                                              Figure 3

Pioneering a New Category
Moreover, “pioneering” a new category through radical innovation has a lingering
effect on brand performance. Evidence from the larger PIMS‟ database shows that
69% of pioneer brands maintain high relative market share positions in their
respective categories, and 54% still enjoy high standing in perceived consumer value
(see Figure 4).

                                              Figure 4
                  Pioneers Keep Their First-Mover Advantage *
                               * measures taken 5 years plus after initial innovation

                                                                            % distribution of




                                            Low                High
                                             Relative Market Share             Source: PIMS
                                                                               fmcg database 1999
                                                                                               page 7

First-movers have an advantage.
 Philips was among the first to develop lighting systems to improve the quality of the home
  environment using colours in ways that had been previously pioneered by decorative paint
  manufacturers. The company subsequently developed spot and halogen lights ahead of its rivals,
  and was also the first to offer low-energy bulbs to appeal to cost-conscious, environmentally-
  aware consumers. When Chinese producers entered the German market in the 1990s with low-
  cost, low-energy bulbs in a „stick‟ format, Philips launched Ambience, a low-energy light that
  looked like a conventional decorative bulb. It took Osram, the number two European lighting
  manufacturer, 18 months to come up with a competitive response. Philips is currently working on
  the next generation of lighting products to maintain its category leadership.
 Launched in the US in 1995, Kimberly Clark‟s Kleenex Coldcare--a facial tissue coated with a
  “leave behind” lotion that was both softer to the face and more durable in use--was a major
  success. When research showed that many users continued using the tissue even after their colds
  had cleared up, the company‟s UK management team suggested an alternative coating process that
  lowered production costs while maintaining product performance. Re-branded as Kleenex Balsam,
  the tissue sells at a price premium and enjoys high consumer franchise. No competitor has yet
  been able to match Kimberly Clark‟s first-mover advantage in this area.

Small Wins
While the big wins are more apparent with successful radical innovations, our study
shows that incremental innovation can still have a significant impact on sales growth,
provided the innovation succeeds in substantially improving perceived consumer
value (see Figure 5).
                                     Figure 5

Incremental innovation can deliver important benefits to retailers and consumers.
 European consumers typically purchase 4 kg. sacks of salt (to combat hard water) to use in their
  dishwashers, which usually have a storage capacity of just over 1 kg. In adding salt to the
  machines, spillage occurs quite easily. Seeing an opportunity to significantly improve consumer
  convenience, Unilever changed the packaging of its Sun dish-washing salt to a container with four
  1 kg. boxes, each with an easy-to-open strip and pouring spout. This move, while incremental,
  immediately reduced waste and inconvenience, important benefits for consumers. More shelf-
  efficient and easier to stock than competitive offerings in flexible sacks, the new rigid packaging
  was also valued by retailers. Within two years, the company achieved a 10% increase in sales.
                                                                                page 8

Companies that are more active than their competitors in incremental innovation also
achieve better marketplace results (see Figure 6). In other words, growth in both
sales and market share are the rewards for a more active, albeit incremental,
innovation process.

                                      Figure 6

Early Assessment of Consumer Value
Assessing consumer value at the concept stage appears to be related to an
innovation‟s potential for success in the marketplace. Figure 7 shows that brands that
focus on consumer value at the initial stage of the innovation process achieve over
twice the growth of those that do not.

                                      Figure 7
                                                                                                                    page 9

Gaining insight into how well consumers like and value a new concept--and feeding
this information back into the R&D process--can help management identify,
prioritise, and solve problems at an early stage, saving time, expensive reworking and
belated testing later on.

An early focus on consumer value gave Antonio Puig the edge.
 Focussing from the very start on evaluating concepts that would deliver the greatest perceived
  value to consumers, Antonio Puig came up with the idea to add oats (“avena”), a traditional
  ingredient of health products, to produce a shower gel that “cares for the skin”. As one of the
  technologists in the team behind the development of Avena Kinesia expressed it, “We set out to
  build the house from the roof down”. Launched in 1994 within a mere 10 months of conceiving
  the idea, Avena Kinesia achieved rapid distribution. Consumer response was so strong that
  production capacities were exceeded within six months. Avena Kinesia reached the number two
  brand position in the Spanish market by the time the large branded competitors, like Henkel, Sara
  Lee, and P&G began including “healthy natural ingredients” in their shower gels. By 1997/1998,
  when store brand copies arrived on the shelves, the “avena concept” had became a major sub-
  segment within the Spanish shower gel market.

A Continuous Race for Innovation Advantage
Brand performance and relative innovation are closely linked. Figure 8 shows that
brands that continue to generate a higher proportion of sales from new products
(when compared to the competition) tend to show a greater growth in market share
and sales.
                                                         Figure 8

                      Relative Innovation Advantage Drives Growth
                                                              Sales Growth      18%

                                                              Share Growth

              Share and Sales
                Growth (%)                                            8%


                                                  Lower               Similar   Higher

                                                  % Sales from New Products
                                                   Relative to Competitors
                                                                                      Source: PIMS / IMD
                            Measured over a period of up to 3 years                   Brand Innovation Study 1999

Further evidence from the cases studied shows that achieving relative innovation
advantage requires the combination of a rapid innovation process, a sustained
programme of continuous and planned innovation over time, and building in features
and technologies that are difficult for rivals to copy quickly.
                                                                                                     page 10

While the race for innovation advantage applies to both brand leaders and challengers
in any given market, our study shows that the stakes are not the same. Figure 9,
which is based on PIMS‟ larger database, shows that when category leaders “pull
ahead” of their smaller rivals by having a greater share of their sales from new
products, they manage to hang on to their high relative market share. But there is no
incremental gain in share. On the other hand, when such leading brands “fall behind”
their challengers in relative innovation, they pay a penalty in loss of market share.

                                               Figure 9
                    Staying Ahead on Innovation Helps Drive Share Gain
                                                                          Annual Change in
                                                                          Relative Market
                                                                0         (% p.a. over 4 years)


                     Market                                     2.4


                                       Falling Behind     Pulling Ahead
                                                                                Source: PIMS
                                             Relative Innovation                fmcg database 1998

For the smaller players, the picture is totally different. Pulling ahead in relative
innovation, according to Figure 9, means a significant reward in incremental gain in
market share--the highest shift upward. But, interestingly enough, falling behind in
relative innovation does not automatically translate into a loss in market share--as is
the case for leaders.

Brand growth is linked to maintaining innovation advantage.
 Each year, Barilla Mulino Bianco identifies 100+ new product ideas in a bid to match
  changing consumer tastes, keep its entire range constantly refreshed, and stay more innovative
  than its competitors. With as many as three major new concepts launched every year, the
  company enjoys full support from the trade, which has come to expect and benefit from
  Barilla‟s innovations.
 Following the development of its Barex plastic pack in 1996--which prevented oxidation of
  pasteurised juice and thus extended shelf life by up to 12 months--Pampryl introduced a series
  of line extensions (packaging and flavours) that reversed the company‟s loss of market share
  and helped return this traditional brand to a leading position. Within two years, the
  combination of these innovations catapulted Pampryl to the number two position (from
  number four) in France‟s highly competitive fruit juice and nectar market where price-
  oriented brands and private labels currently account for a hefty 40% share. In fact, Pampryl‟s
  innovations helped grow the premium segment of the market.
                                                                                             page 11

Speed to Market
In addition to improvement in consumer value and relative innovation advantage, an
innovation‟s speed to market is another factor in a brand‟s performance, as measured
by the growth of market share and sales. Figure 10 shows that the fastest-growing
brands tend to be those that deliver new offers to consumers within 12 months of the
conception of an idea. Brands that take too long in bringing new concepts to market
run the risk that others will get there first, or that consumer priorities will change.

                                            Figure 10

Getting to market both first and fast brings gains.
 Known for producing dessert milk products with excellent flavours, the Mona division of
  Campina Melkunie set out to develop a premium yoghurt that combined digestive health
  benefits with nutrition and good taste. Aware that its competitors had already entered other
  national markets with similar consumer value propositions, Campina avoided test marketing
  altogether in order to be first in the Dutch market. Vifit achieved almost 100% distribution
  after launch and sales grew rapidly. Similar products launched by Nestlé (LC1) and Danone
  have found it much more difficult to gain share. The Vifit concept has since been extended
  into additional yoghurt formats, fresh cheese, and drinks.
 In contrast, Unilever took two years to reformulate its Sun dish-washing detergent. By the
  time the new detergent powder reached the market, it was too late. Consumer attention was
  already focused on the convenience offered by two-layer tablets including rinse-aid offered by
  Benckiser and Henkel‟s perfumed tablets.
                                                                                                           page 12

                                        THE VIRTUOUS CYCLE

Advertising and Communication
Leading brands are often associated with big advertising spend. At least that is what
most people believe. Our evidence, as shown in Figure 11, demonstrates that nothing
is farther from the truth.
                                                   Figure 11

As can be seen, advertising as a percentage of sales has a strong but negative
correlation with the starting relative market share. 2 A leading brand, enjoying a “high”
market share relative to its competitors, typically spends only a fraction of what a
“low” share brand spends. A highly plausible explanation for this counter-intuitive
relationship is that there are strong economies of size in advertising.
Figure 12, based on PIMS‟ larger database, shows the relationship between relative
market share and total expenditure on communication (encompassing investment in
advertising, promotion, selling, etc.). Although a less dramatic difference, once again
we observe that the leading brands are not the biggest spenders on total
communication; that dubious distinction belongs to smaller-share brands.
                                                   Figure 12

    We are using the “relative” measure of market share here to account for the differences in market concentration
    in the various sectors covered in our study. Using a relative measure allows us to compare shares in a highly
    fragmented market, such as cosmetics, with those in a highly concentrated one, such as powder detergents.
                                                                                                 page 13

Consumer Franchise
Another important finding in our study concerns the relationship between advertising
expenditure and a brand‟s strength in consumer franchise. Figure 13 indicates that
there is, indeed, a negative correlation between a brand‟s consumer franchise, as
measured by starting brand preference, and the share of total sales spent on
advertising. The higher the ranking (i.e., the higher the perceived consumer value of
the brand), the lower the actual expenditure on advertising.

                                             Figure 13

Perceived Value and Marketing Communication
An important question arises here: Can a brand‟s inferior perceived value be
compensated with higher communication spending? Or, put in other words, can a
higher promotional expenditure alone reverse a lower initial consumer preference?
Figure 14, based on PIMS‟ larger database, shows that brands with high initial
rankings in consumer preference show the highest gains in relative market share,
almost regardless of the relative levels of communication spending.

                                             Figure 14

                        High Advertising & Promotion Do Not
                     Compensate for Lower Consumer Preference

                                                                           % p.a. change in
                                                                           relative market
                                                             1.4           share over 4 years

                      in Year 1




                                            Low             High
                                    Advertising & Promotion over 4 Years
                                                                            Source: PIMS
                                                                            fmcg database 1999
                                                                                              page 14

High expenditures on advertising and promotion appear to have an important positive
effect on market share only in cases of brands with high initial perceived values. In
fact, the analysis points to a negative market share impact of high expenditures for
brands that suffer from the outset from inferior perceived consumer value. Our
research confirms that a brand‟s performance over time is far more dependent on the
consumer‟s perception of its value than the sums spent on advertising and promotion.

High communication budgets are no remedy for the poor perceptions of a brand’s value.
 In Spain, P&G brought a new proposition, Fairy hand dish-washing liquid, into a market
  where it had no previous presence. This concentrated detergent offered consumers superior
  grease-cutting ability, the convenience of a less weighty product to carry home, and a “cost-
  per-job” advantage of no less than 10% over other brands. The consumer value logic was
 In Britain, P&G used the Fairy brand, which was known in the UK hand dish-washing
  segment as “mild and kind to hands”, to launch its machine dish-washing detergent. The
  choice of the wrong brand to convey the message that Fairy is a powerful cleaner (a key
  desired benefit for the automatic dish-washing segment) led to weak consumer response.
  Despite an intensive communication effort, Fairy never moved beyond the number three
  position in this segment, having not communicated to consumers the added value that its
  technical performance actually provided.

Rewards for Value Enhancement
To summarise, our findings have shown that both sales and market share growth are
the rewards for innovations that create significant improvement in perceived
consumer value. Such innovations, when repeated over time, help drive a brand
towards market leadership. But we have also witnessed that market leaders, i.e., those
with high starting market share positions, enjoy decided economies in their
communication expenditure.
Our findings lead us to conclude that there is a virtuous cycle at work here: Brands
that, over time, achieve a leading market share position for their record of significant
consumer value creation are further rewarded by the need to spend relatively less on
advertising or total communication to promote themselves.
What is true of high-impact innovations is equally true of high relative innovation.
Brands that represent high “relative innovation”--an index of innovation performance
higher than those of rivals--enjoy benefits similar to innovations with significant
consumer value creation. Once again the virtuous cycle is at work here: Brands with a
stronger record of innovation and value creation are rewarded with a greater
consumer franchise that, in turn, translates into a phenomenon of having to spend
less on brand communication than their less innovative rivals.
What is the bottom-line effect of such economies?
As can be seen from Figure 15, when “preferred brands”, or those with higher
perceived consumer value, are compared with brands that do not enjoy such
franchise, the former shows higher returns on capital employed.
                                                                               page 15

                                      Figure 15

The better returns are due possibly to the aforementioned economies, in addition to a
preferred brand‟s ability to command a premium price and a higher margin. The
higher returns confirm once again the logic of the virtuous cycle: The high innovators
that have achieved a higher consumer preference and franchise enjoy far greater
returns on their investment than other brands.

The Elements and Imperatives: A Conceptual View of Innovation
The different elements of the virtuous cycle of innovation highlighted above are
represented visually in Figure 16 and elaborated below.

                                     Figure 16

                               Brand Equity Development

                           Communication       Innovation

             Consumer                  Value                  Consumer
               Value                                           Value
             Proposition                                      Creation
                                                                                            page 16

There are three integral elements to the cycle as we have defined it so far:
Innovation, Value, and Communication. It is the interaction among these elements
that provides the imperatives and the force behind the virtuous workings of the cycle.
The cycle starts with a brand‟s commitment of resources to innovation. Here, deep
insights into consumer behaviour and needs are translated into a new product, with
technology playing its role as an enabler. To be successful, the specific innovation
has to lead to a greater consumer value than what is currently being offered in the
marketplace. In fact, the relationship between innovation and value is what the
imperative of consumer value creation is all about. However, unless the added-value
thus created is communicated to and understood by the consumer, an innovation‟s full
potential is never realised. In other words, the innovation‟s market potential is
realised only after a persuasive consumer value proposition is formulated and
effectively communicated to consumers.

Communicating a persuasive value proposition to consumers.
 Responding to consumers‟ desire for more healthy eating, Unilever developed an olive-oil
  based spread for the UK market. Initially pitched to health- and weight-conscious consumers
  using a “low fat/low cholesterol” message, Olivio’s value proposition was not in any
  significant way different from what was being communicated by a large number of other low
  fat/low cholesterol spreads on the market. Olivio’s rise to success came only after brand
  management switched its communication to a different approach emphasising the product‟s
  Mediterranean heritage and pointing out the combined effects of diet and lifestyle on health.
  At a time when the Mediterranean way of life and diet were increasingly appreciated for their
  health-promoting effects, the revised brand value proposition became a convincing one.

A convincing consumer value proposition is just that--a proposition. In the end, it is
not the communication that decides the fate of an innovation, but the consumer‟s own
experience with the product. An innovation that fails to stand up to its value
proposition will fail regardless of how skilful the communication. To survive this acid
test, the innovation must simply deliver on its promise.
Assuming that the consumer‟s experience confirms the innovation‟s added and
differentiated values, a trusting relationship is now established whereby the brand
stands for more than just a product. The trust, and the expectations of higher
perceived and delivered value, are the basis for the next imperative of brand equity
development. Brand equity, as defined here, captures what we have referred to earlier
as the qualities of a more preferred brand as it enjoys a higher perceived value. This
concept is also responsible, as we have seen, for the greater efficiency in
communication and the higher returns on capital invested.
Indeed, it is the better economics that explain the virtuous upward spiral of our cycle.
At the end of its full first circle, a differentiated and “preferred” brand potentially
enjoys a combination of incrementally higher sales and market share, lower
communication costs, and a greater return on invested capital--all of which should
provide further resources and incentive for another round of innovation.
But a virtuous cycle can also be broken. It can happen in several ways. First, an
innovation can fail to create a differentiated added-value. As we saw earlier,
innovations that do not generate a significant improvement in consumer value fail to
have a significant impact on sales or market share--the bases for improved economics.
                                                                                  page 17

Second, the differentiated added value can be potentially high, but poorly
communicated. Failing to develop a compelling consumer value proposition can
undermine any innovation.
Third, and potentially perhaps most damaging, the success of initial rounds of
innovation fails to trigger future rounds of innovation. Brand management becomes
complacent, only too happy with the improved market standing and enhanced brand
equity. Priorities are shifted elsewhere, and the innovation process is left starving for
It is therefore in the brand-builder‟s best interest to stay in the innovation race as
there is no room for spectators, only winners and losers.
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             Definitions of Key Terms used throughout this Report

  While innovation can pertain to a change in any of a number of business practices,
  the innovations we studied primarily relate to changes in product design, content,
  functions, and performance. These changes represent a departure from the past and
  are meant to offer additional benefits to target consumers.

Perceived consumer value
  Perceptions of value drive consumer choice and decision. These perceptions can
  pertain to expectations of a product‟s tangible functions (e.g., how clean a
  detergent washes greasy dishes, or how “freshly squeezed” an orange juice tastes)
  or intangible qualities (e.g., a new “modern” design for decorative crystal products,
  or a “younger skin” for a new anti-ageing facial cream). Either way, consumers
  define value by how they perceive competitive offers and their features (including
  price) and benefits, both tangible and intangible.

Consumer preference
  To overcome the difficulties inherent in measuring perceived consumer value, we
  have used “consumer preference” as a surrogate for perceptions of value.
  Consumer preference reflects the combination of a brand‟s performance along both
  tangible and intangible parameters as perceived by its target consumers and as
  measured and reported by management.

Brand performance
  We have used growth in sales and/or market share and returns on investment as the
  yardsticks for measuring a brand‟s overall health or the impact of specific
  management actions.

Relative market share
  Relative market share is calculated by dividing a brand‟s share of its market by the
  sum of the shares of the top three competitors in order to allow for meaningful
  comparisons of market share performance among product categories with differing
  degrees of fragmentation and concentration.

  A measure used to represent a brand‟s profitability, Return on Capital Employed is
  calculated by dividing profits (before interest and tax) by the capital employed as
  defined by total fixed assets at net book value plus working capital. A positive
  change in ROCE implies an incremental increase in a brand‟s profitability; a
  negative change means a decline.
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IMD, which stands for the Swiss-based International Institute for Management
Development, is an independent, not-for-profit foundation specialising in management
research and executive development. IMD is one of Europe‟s leading business schools
with a world-wide reputation for its executive programmes.

PIMS, which stands for Profit Impact of Market Strategy, was founded by the
Strategic Planning Institute as an evidence-based strategic consulting organisation.
PIMS has worked with business managers and compiled market and competitive
profiles on thousands of businesses in many industries operating in regional, national,
and international markets. Using this evidence, PIMS has undertaken extensive
analysis of key success factors to support its work on performance improvement.

AIM, which stands for the European Brands Association, represents the branded
goods industries in Europe on key issues which affect the ability of brand
manufacturers to design, distribute and market their brands. AIM‟s membership
groups 1600 companies of all sizes through corporate members and national
associations in 20 countries. These companies are mostly active in fast moving
consumer goods.

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