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Brand architecture strategy and firm value: how leveraging, separating, and distancing the corporate brand affects risk and returns

  • Original Empirical Research
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Abstract

Despite evidence suggesting a growing incidence of brand architecture strategies beyond the branded house (e.g., Boeing and IBM) and house-of-brands (e.g., P&G with Tide and Cheer), and recognition that in practice these strategies are very different, there is still a need for research on how financial markets value the full range of brand architecture strategies pursued by firms. We replicate and extend Rao et al.’s (Journal of Marketing, 68(4), 126-141, 2004) investigation of brand portfolio strategy and firm performance by (1) adding sub-branding and endorsed branding architectures, (2) clarifying the “mixed” architecture to constitute a BH-HOB hybrid and remove sub- and endorsed branding variants, and (3) quantifying the impact of a company’s brand architecture strategy on stock risk in addition to returns. To explore the risk profiles of these five different strategies, we offer a brand-relevant conceptualization of the sources of idiosyncratic risk that may be exacerbated or controlled through brand architecture strategy: brand reputation risk, brand dilution risk, brand cannibalization risk, and brand stretch risk. We demonstrate superior results in terms of model performance using the expanded five-part architecture categorization and conclude with implications for practice. Our results show that risk/return tradeoffs for sub-branding, endorsed branding, and the BH-HOB hybrid differ significantly from what common wisdom suggests.

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Notes

  1. To evaluate the success of new products, managers consider not only to what extent this demand comes at the expense of (cannibalizes) their own products (Carpenter and Hanssens 1994) but also to what extent it comes at the expense of a competing firm’s products (brand switching). Cannibalization is often not beneficial since the net number of products sold does not increase and profits may decrease too, depending on the respective margins (Van Heerde et al. 2010). Brand switching, in contrast, comes at the expense of a competing firm’s brands, and is always beneficial to the firm. Our focus from a risk perspective is on the former downside risk.

  2. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  3. The parameter s i indicates the extent to which the firm’s stock returns move with those from a portfolio of small stocks (higher value for s i ) or those from large stocks (lower value for s i ); similarly, h i takes on a higher value when the stock returns show more correspondence with those from high book-to-market equity firms and lower values when they are closer to the returns from low book-to-market equity firms. The parameter u i indicates the extent to which a firm’s stock has momentum. Short-term excess returns appear in the form of ε it .

  4. The number of observations is 9*302 = 2718 provided there are no missing values. We use the list-wise deletion of missing values in the empirical analysis following standard practice (Little and Rubin 2002). Since COMPUSTAT does not comprehensively report advertising and accounting variables for all years for all firms, this approach yields 1188.

  5. Rao et al. (2004) suggest a confound between brand portfolio strategy and the firm’s status as a B2B versus B2C player. Though our sample suggests that B2B firms are highly likely to pursue BH strategy, our sample diversity allows a significant number of B2C firms in the BH strategy to tease out these two effects. We find that performance results for the BH strategy are not constrained to B2B firms only; the BH risk/return profile holds when controlling for B2B vs. B2C firms. As an additional check, we added the interaction effects of the brand architecture strategy variables with the business-type dummy variables; our findings remain robust.

  6. We perform endogeneity test using the “IVREG2” and “IVENDOG” procedure in STATA 12.1.

  7. To illustrate, Yum! Brands has two strong brands on the Interbrand list, KFC and Pizza Hut, and hence the brand equity variable = 2 for Yum! Brands.

  8. Fortune’s metric is reported on a ten-point scale, as derived through ratings on a variety of factors predictive of brand strength. We collect each company’s annual Fortune’s brand reputation score from 1996 to 2006 and substitute, for missing values, the average reputation score for U.S. firms in the relevant industry for that firm.

  9. We use R&D to measure new product introductions as in Kelm et al. (1995). Since R&D expenditures are reported in COMPUSTAT only for a small subset of 197 firms, we report these results as a part of robustness and not as a formal control variable in the model.

  10. Our results confirm the conclusion of Hanssens et al. (2001, p. 293) that “it is seldom necessary to engage in such an iterative procedure, though, as the OLS identification results alone are typically satisfactory.” We perform ARMA (2,0) model using the “xtgee, corr(ar 2)” procedure in STATA 12.1.

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Acknowledgments

This paper is dedicated to the memory of Thomas Madden whose curiosity about brand finance and its interplay with portfolio strategy inspired the research idea. The authors thank Vivek Goyal, Suryabir Dodd, Julie McCluney, Claudio Alvarez, and Anna Eng for help with the data and coding. Boston University School of Management is acknowledged for its Faculty and PhD research support.

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  1. College of Business Administration, University of Alabama in Huntsville, Huntsville, AL, 35899, USA

    Liwu Hsu

  2. School of Management, Boston University, Boston, MA, 02215, USA

    Susan Fournier & Shuba Srinivasan

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Hsu, L., Fournier, S. & Srinivasan, S. Brand architecture strategy and firm value: how leveraging, separating, and distancing the corporate brand affects risk and returns. J. of the Acad. Mark. Sci. 44, 261–280 (2016). https://doi.org/10.1007/s11747-014-0422-5

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