UCL School of Management is delighted to welcome Ron Borkovsky, University of Toronto, to host a research seminar discussing ‘Brand building to deter entry and its impact on brand value.’
Brand valuation methods have traditionally focused on the value a brand generates via its ability to enhance demand and accordingly profitability. In this paper, we explore and quantify another important way in which a brand can generate value for a firm— specifically, through the ability to deter entry of new competitors. In this respect, we are distinguishing between a brand’s direct effect—i.e., its impact on demand—and its strategic effect—i.e., its impact on the behavior of rival firms. We investigate this issue within the context of the U.S. stacked chips category using a dynamic model of brand management that endogenizes both brand building and entry decisions. We find that a significant proportion of a brand’s value (up to 58%) can be attributed to its ability to deter entry. We also find that the threat of entry impacts the value of the firm and the value of the brand in qualitatively different ways; as the threat of entry increases, the value of the firm necessarily decreases, but the value of the brand can increase because the ability to use the brand to deter entry becomes more important. Finally, we find that an increase in the effectiveness of advertising can decrease the value of a firm’s brand because—despite enabling more effective brand building—it can weaken the firm’s ability to deter entry.