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.