Why Branding Isn’t a Source Of Competitive Advantage


Coca-Cola could lose all it's employees, cash, physical assets, pretty much everything, and still get a loan for a billion dollars. That is a paraphrased version of something a marketing professor told me in b-school. I was shocked. The Coca-Cola brand is worth a billion dollars? Wow. That must explain why, up until the late 1990s, Coke stock has given investors a fantastic return.

I get emails all the time from people who want me to check out their website, business plan, idea, or whatever. One of the questions I like to ask is "what is your competitive advantage?" One common answer is branding. There are lots of people that think they will build a brand that consumers will pay higher prices for, and that their marketing will be the thing that differentiates them from everyone else in their industry. Those people are wrong.

I used to be one of them. One of my early goals was to start a company in a small but growing niche, and use my marketing prowess to build it into the brand that defined the niche. I wanted to be Kleenex or Xerox or Google. But that is because I was stupid and as I would soon find out, my marketing skills didn't quite qualify as a "prowess." The reason this wasn't a good approach to starting a business is that brands like those mentioned above don't necessarily have any competitive advantage despite being well known by consumers. Even when competitive advantages are present, they are usually not the result of branding.

What is a competitive advantage?
If you and I played a game of basketball and we each scored 10 points, would you say that one of us had an advantage? Probably not. Yet we do that all the time with companies. Two companies can have the same return on invested capital or the same profit margins, and new companies can enter the fray all the time while old ones leave the market, and we talk about each company's competitive advantages. If you are only doing the same thing as everyone else, and lots of people are doing it, do you really have a competitive advantage?

Competitive advantage is usually found in industries that have higher than average returns. It is usually some barrier to entry, but could stem from other things as well like customer captivity, economies of scale, or unique physical assets. The correct answer to the question "what is your competitive advantage?" will, more often than not, be "nothing." Most industries don't have them. Actually, let me clarify that a bit. Most companies and or industries don't have sustainable competitive advantages. You may have one when you set out, but your competition will quickly duplicate it.

Now, if you accept my argument that average returns on capital are indicative of a lack of competitive advantage, then it naturally follows that branding cannot a source of competitive advantage. Many well know companies, even those with high end luxury brands, don't have above average returns. But what about Coca-Cola? Their above average returns primarily came from economies of scale in marketing and distribution. The billion dollar value of the Coca-Cola brand has been built over time, and is only connected to competitive advantage through Coke's real forms of advantage.

Why does this matter?
Building a brand requires investment, just like building a plant or a sales force or a distribution channel. It shouldn't be taken lightly, as it is a serious asset of any company. At the same time, you have to keep in mind that the power of a brand is limited by the company behind it, and is not a force in and of itself that will drive excellent returns. In other words, marketing can't save a lousy business. And that is the point that inspired this post.

I used to think that marketing was the key. I used to think that I could craft my message and get the word out and that people would come running, but it doesn't work that way. The best you can do with a marketing genius and a lousy business model is create a fad.

Running a business is like one giant optimization problem. How do you get the best outputs given your limited inputs? Don't focus too much on branding at the expense of financial and economic analysis. I've seen it happen, and I've seen the damage that such thinking can do to a bottom line.

People are always looking for the easy way to make a buck, and gurus and pundits are quick to fill that need. There are plenty of books and blogs about the "5 key marketing tricks" or the "one thing your brand needs." Don't fall for them. Keep your head down, stay focused, and put branding in it's proper place. It's hard to solve a puzzle if you only have one piece.

  • Maybe branding had more impact when there were fewer choices, and fewer ways to get the word out.

    Zappos would be a great example of a company that does very little traditional marketing/branding, yet has grown to a half-billion dollar company in just seven years. They execute well, offer free shipping, and in general, aren’t required to charge sales tax. The latter is a competitive advantage others can’t match.

    I think branding has a place in marketing. And marketing has its place within an organization. Great product, sold at a fair price, with solid customer service, tend to win over time.

  • I would perhaps rephrase the title and say Branding alone isn’t a source of competitive advantage. Yes, the organisation needs to have competitive advantage in products/services or how value delivery is carried out. However, communication advantage is crucial too, and branding pays an important role in that. My views.

  • J

    Even (especially?) with a proliferation of choices, I still think branding is a competitive advantage in situations where “known quantity” issues come into play, and there are a lot of those. I’ve eaten at a lot of restaurants that were considerably better than, say, Chilis or Olive Garden, but in a situation where I’m unfamiliar with the choices available snd have time constraints, I know either one will be acceptable.

  • Rob,
    Good post! I once worked for a corporate subsidiary that believed it could create any product and then use marketing to sell it. Those of us in marketing argued against the philosophy knowing well that one should create products for already existing markets willing to purchase those products out of wants, needs and/or desires. The subsidiary lasted four years and we were part of a multi-billion dollar corporation. Money can’t buy love any more than brand can.

  • David G

    Hi Rob — let me suggest a framework for re-thinking this …

    1) Financial results and competitive advantage are not (directly) related. Because we compare companies financials, it is common to consider them ‘competitive’ but in reality, the only thing two companies can compete for is demand — because that is the only resource competing companies have in common — so, when discussing “competitive advantage”, the only relevant comparison is market penetration.

    2) So … to understand whether branding is a competitive advantage or not, you need to ask yourself whether branding is likely to influence a purchasing decision i.e. does a strong brand drive demand vs. competitive offerings. When doing Thanksgiving shopping, do consumers reach for a litre of Pepsi, or did they buy the un-known cola brand? Clearly a strong brand is a competitive advantage — the tangible “asset” that makes well-known consumer brands more competitive than their rivals is “trust”. The trust that comes with brand familiarity opens a consumer’s wallet more easily than brands that don’t enjoy that social capital.

    3) … the old theory of branding = marketing = advertising is horribly flawed. Advertising is possibly the least efficient means of marketing — and marketing is a just one facet of a brand’s image (just look at dell and consider the importance of service and distribution to that company’s brand).

    I’ve seen this at work at our startup. We’ve built the strongest brand in our space and it’s definitely a competitive advantage — competitors are now carbon copying our product but none have come close to our market share. Interestingly, we decided to forgo advertising in our marketing strategy and instead invested in our product — it’s a strategic marketing decision that’s had a more positive impact on our brand than we had expected.

  • It is certainly the case that brand image (the symbols, words, and images that promote a brand) alone cannot create a sustained business – brand experience (the accumulation of validating or invalidating interactions with the organization and its promised value) ultimately makes or breaks the organization. When both are top-notch, then you have a truly valuable brand!

  • Yep, people often think that just because they have a good idea and some creative ways to brand themselves that’s all they need, and they forget to focus on what really makes a business a good reliable, and strong business.

  • Bill Tanner

    Marketing is leverage that can be applied to a good, differentiated product or service, accelerating acceptance of benefits consumers actually want. Coke and Pepsi have both had new product failures when they tried launching undifferentiated or unwanted products supported by heavy ad spending. Remember Fruitopia, Pepsi Clear, KMX, Max Beverage Mix, New Coke, Disney Fruit Drinks, etc?

  • David G

    Bill —

    That’s a GREAT definition of marketing.

    Rob —

    I understand that my frame of reference is heavily skewed towards startups but I’d argue that CA is more advantageous to a new business than it is to a profitable one — that’s why “buzz” is so unbelievably valuable (probably a new products most useful asset) — and I still think financial performance (other than rev-share) is a really poor measure of CA, though I don’t doubt there’s a strong corellation.

  • Rob,

    I respectfully disagree with you on many of your points. Branding isn’t a source of a competitive advantage? How can you come to this conclusion? Brands can be the greatest competitive advantage. Using your example – If you and I played a game of basketball and we each scored ten points, yet my personality, style and charisma drew others to want me on their team instead of you, I would have the competitive advantage. For the simple reason that I would be able to play the game longer and score more points based on more playing time.

    A brand is the emotional connection between a customer and a product, service or organization. It’s much more than a logo or tagline. It is the sum of all experiences a customer has with you. Emotional connections are powerful things. They will trump reasoning in purchase decisions. They will inspire consumers to wait or go out of their way for a branded product if it is not immediately available. In some cases brands inspire people to tattoo themselves with a brands’ identity.

    In contrast to your view, strong brands are very powerful competitive advantages. We see this everyday. Look at bananas, water or vodka, how do you become a market leader in these categories? By understanding that consumers do not develop relationships with products nor or are they loyal to products. Brands and what they stand for establish the emotional connection with consumers. Once you have built this connection you you’re your target paying more for your water, seeing a difference in your vodka, and preferring your bananas.

    Leading organizations have discovered that brands are their most valuable asset (along with their people) for a number of reasons. Strong brands deliver substantial benefits:
    Increased revenues and market share
    Decreased price sensitivity
    Increased customer loyalty
    Additional leverage with vendors and retailers (for manufacturers)
    Increased profitability
    Increased stock price, shareholder value and sale value
    Increased clarity of vision
    Increased ability to mobilize an organization’s people and focus its activities
    Increased ability to expand into new product and service categories
    Increased ability to attract and retain high quality employees

    You mention marketing cannot save a lousy business, I agree. But with the right branding strategy you may get a second chance. Your customer will share unmet needs. If you listen and meet new or existing needs they will bring their business. Brands are created in the mind; powerful competitive advantages have been created there too.

  • Rob

    I don’t see any evidence to back up your point. First of all, many powerful brands like Mercedes-Benz have a return on invested capital that is equal to that of any other car company? Where is the advantage there? Secondly, when a brand does have abnormal returns and/or market share, it is a reflection of other factors like economies of scale or barriers to entry, not the brand itself.

    What would have to happen for me to believe that branding alone is a competitive advantage? Show me two companies with products that are almost identical, but one has invested more money in the branding and it has led to higher returns on capital than their competition.

    I’m not saying branding isn’t important – because it is. I’m saying that branding isn’t what leads to excess profitability.

  • Jen

    I think too many companies focus all their money on “branding” as their strategy for success, rather than put it into research and development that would make the product meet a customers need. Too often what is hyped does not deliver. This is exactly Lucas Conley’s premise in his book, “obsessive Branding Disorder.” Branding is only ONE tactic towards success or profitability. And as a business, you have to understand the promise that you are delivering to people with your product. If you think it delivers a particular promise, but your customers view it differently, no amount of money that you spend on branding will change a customers view.

  • Umar abdul-hamid

    I cannot but agree that branding alone cannot be a sustainable source of competitive advantage;but other factors such as the economies of scale,financial and economic analysis,i.vestmrnt in capital etc.