Brands, innovation and growth
Simon Amos of PIMS Associates discusses the results of a new PIMS analysis comparing the innovation performance of branded and non-branded businesses.
The case for branding, in consumer products as in other sectors, rests on its role in helping consumers to exercise choice and recognise products in a crowded market place as well as enabling producers to communicate with end users, and to gain recognition for innovative approaches that meet consumer needs.
The PIMS Competitive Strategy Research Database (PIMS Database) contains data on 500+ strategic variables measured over a minimum of three years for more than 400 FMCG businesses.
Analysis of the PIMS database shows that wider economic benefits are likely to arise when product branding exists. Brand owners invest larger sums, and invest more efficiently, in areas, such as innovation, that create economic growth, employment and productivity. This is the result of competitive stimulus and the role branding plays in enabling FMCG businesses to reap the rewards of investment. These findings are explained below.
PIMS’ key measure of successful innovation is the proportion of new products in the sales mix. This measure concentrates on the main area of innovation in this sector – product innovation.
The PIMS Database shows a strong association between the proportion of new products and the level of real market growth.
It is generally accepted that innovation is at least desirable, at most essential, for the ongoing health of an economy. But, relating innovation to macroeconomic measurements is about more than just the innovation relationships depicted above. The overall level of innovation, and hence its impact on economic productivity and growth, is affected by the specific characteristics of the economy and the markets within it. These characteristics address not only the ability and incentives to create new ideas and processes, but also the systems in place to ensure the effective distribution of these innovations.
The notion that intangibles can play a significant role in boosting economies is recognised, but academic work is yet to approach the specific questions we are raising here; about the effect of marketing communication and knowledge transfer to end users on innovative capabilities. The question is certainly intriguing.
So, as yet we are unable to assert the extent to which the ability to brand products, via increased innovation effort, can alter the productivity and growth of economies.
However the known links between innovation and the macro economy do allow us to assert the direction. And the PIMS Database shows that branding in FMCG businesses creates a competitive stimulus that is positive for innovation, and therefore positive for productivity and positive for economic growth.
Efficiency of innovation investment
A key criticism of British economic progress is that productivity is still insufficient for prosperity. One of the reasons productivity is still too low is that investment is inadequate, especially in research and innovation.
Value added is the basis for measuring total growth in an economy and requires businesses to maximise the returns to capital and employment. This not only needs firms to focus on the battle for consumer preference, but also demands efficiency in supply to minimise external costs.
The PIMS Database proves that R&D expenditure is a key investment for branded FMCG businesses to compete in their markets. Further investigation of the impact of R&D reveals an interesting relationship. It shows that the value added per employee in branded FMCG businesses is higher than the average of all other businesses in the PIMS Database.
The additional productivity gain from R&D investment in the branded FMCG businesses may be due to the importance of differentiation and quality in achieving competitive advantage in this sector.
Supporting their brands through advertising and promotion enables businesses to:
This ability to connect with end users improves the chances of turning development ideas into successful products that meet the needs and expectations of consumers. The evidence certainly suggests a complementary relationship between R&D investment and branding in creating additional returns on each unit of investment.
So, the case for branding
Supporting their products’ brands enables FMCG businesses to communicate more effectively with end users, and as a result these businesses:
The impact on value added per employee of higher R&D in the branded FMCG sample is approximately double that for industry as a whole.
This creates the:
The end result is that branding drives a move to the right of Figure 1, where FMCG markets, and the economy, benefit from superior productivity and growth.
To view this article in full, including graphs and charts, click on the link below.
This article originally appeared in British Brands, the publication of the British Brands Group, issue 20. Contact firstname.lastname@example.org or Tel: 07020 934250.
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