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Pinpoint precision in a brand plan review

It is important to improve the risk-adjusted return on investment ratio when performing the annual brand plan review
Pinpoint precision in a brand plan review

If there is one constant across every pharma company, it is the ritual of the annual brand plan review. Months of preparation lead to a finely-honed PowerPoint, which is presented to the leadership group like a tribute to the gods. Typically, the brand team emerges a couple of hours later with a revised plan that is tasked with achieving rather more while spending rather less. Is this annual sacrament worth the effort? Does it create more value than it consumes? Research indicates that, in many cases, it does not.

A review process that should result in a much stronger plan all too often delivers nothing more than a few minor tweaks at a huge cost in time. Further, those tweaks may destroy, rather than create, shareholder value. A few, rare companies make the annual review valuable and these exemplars differ from their rivals in just four small, but vital, ways.

Intent
The first difference between valuable and wasteful brand plan reviews is one of intent. In most companies, the reviewing leaders focus on the return on investment (ROI) ratio. They therefore look for ways that the brand plan's promised sales can be increased while, at the same time, trimming the expenses. By contrast, the exemplary few look to improve the risk-adjusted return on investment ratio and those two little words make a huge practical difference.

In most companies, stretching the targets and pruning the spend results in a plan with a better nominal ROI but which has a lower probability of delivering on its promises. As a result, the risk-adjusted ROI is often less after the review than before; the exact opposite of the desired result. In those few companies who take the more thoughtful risk-adjusted ROI approach, the emphasis is less on stretching and cutting and more on understanding and managing the probability of the plan delivering on its promises. This may sound like a subtle and unimportant difference, but the reality is that it differentiates those firms who create shareholder value from those that do not.

Managing the risk
Given a risk-adjusted ROI approach to assessing brand plans, the challenge is to identify, quantify and manage the business risk inherent in any plan. There are, as will be discussed, numerous reasons why the plan may not deliver on either its top line or bottom line promises and in this myriad of threats lies the challenge that only good companies overcome. It is simply not possible to assess rigorously and take action on every possible threat to the plan's success, so the more effective leadership teams learn where to focus their critical gaze on one of the three principal sources of business risk. (See figure 1.)

Figure 1: The components of business risk

Figure 1: The Components of business risk

Wise leadership teams seem to have learned that these risks vary according to the life cycle of a product category. So, with a new, first-in-class product, they worry more that the market size may not be as predicted (ie market risk). This is less of a concern when operating in a mature, established product category, when effective leadership teams then focus on the risk that the brand plan may not deliver the market share it promises (ie share risk). Finally, in very mature, perhaps declining, product categories, the primary threat is that the profit margin may not be all that is hoped for (ie profit risk) and, accordingly, leaders focus on that risk.

This habit of focusing on different risks at different stages of the product category life cycle is valuable for two reasons. First, it helps the leadership team to see the important risks among the not so important. Second, because each kind of risk demands a different kind of risk management response, it allows better, more constructive recommendations to be made to the brand teams.

Dismantling and graduating  
The third distinguishing habit lies in the way these effective leadership teams analyse rigorously the most important risk source, whether that is market risk, share risk or profit risk. This analysis task is not easy, because each of the risk categories is complex and multifactorial, but good leaders overcome this with a two-part trick: dismantling and graduating.

The first step, dismantling, involves breaking down the risk into its component parts, of which there are five for each category and 15 in total. These range from the risk the market will not grow as predicted to the risk that the competitors will respond aggressively.

The second step, graduating, involves placing each of these 15 component risks (or, more usually, the five that are the most important) on to a graduated scale from 'relatively low' to 'relatively high'. This graduation is not a subjective process. The best firms have carefully developed descriptive scales that enable objective risk assessments. The net result of this two-stage dismantling and graduation of risk is a crystal clear and impartial prediction of where the risk lies in the brand plan. Or, to put it another way, where the plan really needs sharpening.

Having taken a risk-adjusted ROI approach, focused on the risk area most relevant to the product category life cycle and then dismantled and graduated the important risk, the review process has already added huge value to the brand plan. Certainly, this approach is much more useful than the more common 'pick at the detail, stretch the targets and cut the costs' method.

But the real value comes in the fourth and final divergence between good and bad practice. Because the review has generated a detailed and objective critique of the brand plan, identifying those component risks that are relatively high, it can now inform specific recommendations for managing those risks. These recommendations are specific to each type of risk. Components of market risk, for example, are usually managed by better market research or by comparisons with closely analogous product categories.

The five shared risk components each have a specific management solution, such as better segmentation or trend analysis. Profit risk can be managed by various actions, including spreading competitor impact and making realistic margin assumptions. Overall, in companies that do the brand plan review well, the brand manager leaves the room with a short list of practical steps he or she can take to improve the plan and, once those steps are taken, he or she has a brand plan that has a much higher probability of delivering on its promises. In return, the leadership team now knows it has spent its time well, not simply fiddling with the detail, but maximising risk-adjusted ROI and creating shareholder value.

Put in these terms, the effective brand plan review process seems obvious and easy. In strictly rational terms, it is. But the fact that so few companies adopt this approach suggests that there may be hidden, irrational barriers to its implementation. Research suggests that this is indeed the case.

Three reasons have been identified, which explain why firms do not review brand plans effectively. The first is about capabilities: many leadership teams do not have the right skills. Fortunately, this is easy to fix with a little training and reading.

The second is about politics: conflict between marketing and finance gets in the way. Again, cross-functional working barriers can be overcome, given the commitment of the leadership team.

The third is about inertia. Many chief marketing officers (CMOs) are not motivated to improve the review process as it is easier to stick to the old, less effective routine. This is perhaps the biggest barrier but, over time, innovative CMOs are picking up these ideas while their laggard counterparts are languishing in old practices. As a result, this diligent, professional way of conducting the brand plan review is gradually becoming as common as it is necessary.


Dr Brian D Smith - Pragmedic
The Author
Brian D Smith
is adjunct professor at SDA Bocconi and a visiting research fellow at the Open University Business School. He also runs www.pragmedic.com, a specialist strategy consultancy.  

 

12th January 2012

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