XF1-InsightsOnIngredientBrandingSmeal11-20-09

Ingredient Branding: ZIBS/ISBM Research –R. Oliva, Draft 2

Insights on Ingredient BrandingRalph Oliva, Raj Srivastava,Waldemar Pfoertsch, and Jennifer Chandler

Nov 15, 2006

At the very essence of what all firms do -- business-to-business and business to consumer – is the creation of better alternatives to what came before: the creation of new value (Anderson and Narus, 2004, Oliva, 2006).

Often the primary source of exciting new value for consumers happens way upstream, in the R&D1 and new offering realization processes of B-to-B firms, who then send a new “ingredient” of a spectrum of new offerings down into the value chain, where it eventually reaches the end-user/consumer2.

As these upstream, B-to-B firms create new value, in some cases the downstream impact for the end –user are “linear” or incremental, and create relatively small changes in downstream offerings compared to the current alternatives. Their impact may be to reduce cost upstream, or enable an offering manufacturer or Original Equipment Manufacturer (OEM) to label a current offering “New and Improved” or list another feature or benefit among many (Bengtsson, 2002).

Occasionally, however, upstream firms, through investments in R&D, genuine understanding of downstream customer need, various “breakthroughs” create large bursts of value, where that value has significant impact delivered downstream to the end user3.

As outlined by Raj Srivastava and others (Shocker, Srivastava. and Ruekert, 1994; Frels, Shervani, and Srivastava, 1989; Aaker, 2003; Kotler and Keller, 2006; Pfoertsch and Mueller, 2006): if a situation arises where the following factors are present, there is an opportunity for the supplier to create a “branded ingredient”:

1 Agilent, AMD, ATI, Bitrex, Blaupunkt, Bose, Ceran, ESP, GE-Fanuc, GoreTex, Makrolon, Microban, DLP, DOLBY, Lycra, Lexan, Nirosta, NORTHSTAR, Makrolon, Microban, NutraSweet, nVIDIA, RECARO, Schott, Splenda, Shimano, Solae, Stainmaster, Sympatex, Teflon, Techron, TetraPak, Trevera, Woolmark, Z-Trim, etc.2 Often it takes many years until such a product has been introduced to the market. Teflon was invented 1938 and became a consumer known product feature in the 60s; Splenda, a low calorie sweetener was invented by Johnson and Johnson in the 70s and brought to large consumer attention in the late 90s.3 The most significant example is the Intel Inside campaign where Intel utilized the power of performance of processor chip design and manufacturing to tell the end customer that their offering is special compared to the offerings of the 25 competitors at that time.

© 2006, ISBM – Penn State/ZIBS -- Emory 1

®


A large improvement in downstream value is created, based on an ingredient from an upstream supplier,

The benefit is real, visible and important to the downstream end user. The benefit might be “invisible” at the point of sale, not easily discerned until the

product/service/offering is put into use. The firm, manufacturer or OEM the ingredient “User” is compelled in some way to

“call out” this ingredient to the end user – to make it apparent at the point of sale that there is a “special ingredient” in the offering that is making it a higher value, and

The benefit is articulatable to the consumer in ways that can spell higher prices or higher propensity to buy…

For the purposes of this paper, and from the perspective of the ingredient brand (Pfoertsch and Mueller, 2006), we will use the following definitions4:

Ingredient creator or component supplier: an upstream firm that has created the ingredient, and is selling it downstream to “ingredient users” or Original Equipment Manufacturer (OEM) who then takes the ingredient and create offerings for downstream “consumers,” who receive the ultimate benefit and value of the ingredient.

The ingredient creator provides the basis for the ingredient user to develop and market product offerings to the enduser which could be distinguished by the unique product or

4 In other publication the same situation is descript as a relationship between brands: see Desai/Keller 2002 or the construct of mixed brands are used (Bengtsson, 2002).


Ingredient Creator

Ingredient User/OEM

Value Adder / Channel

Consumer

Ingredient Brand: From Creator to Consumer

Fig. 1: The players: “Ingredient Branding”

Value Adder / System


service features. This creates a unique value proposition for all parties involved in this process. All these “value adders” use the existing product or service combination and add their specific features to the offering and even more, improve the current product. This could be through additional integration work, such as software or engineering in the case of systems supplier or through additional offerings on the way to the market (channels).

In between the “ingredient creator” and the “ingredient user or utilizer” there could be another “value adder”. Also between the “ingredient user” and the “consumer or enduser,” might be one or more “channel partners.”

Potential Benefits of Ingredient Branding to Ingredient Creators

Properly done, ingredient branding can bring a host of benefits to the ingredient creator, including (Norris and McCarthy, 1999; Havenstein, 2004):

Higher prices – greater value harvest over the ingredient life, held upstream. Greater bargaining power/control of the ingredient users. Greater bargaining power/control of channel partners. The creation of a separate brand – in Srivastava’s terms a “market based asset,”

which accrues to the ingredient creator. Additional downstream pull for products from users, thereby increasing cash flows

for the creator. An ongoing creation of “expectation” downstream from consumers that the ingredient

creator will continue to create new ingredients – accelerating uptake of new ingredients, both for the ingredient users and the consumer.

Greater clarity and control of communication of the consumer benefit created by the ingredient.

An endorsement for weaker brands downstream, enabling them to participate in markets against stronger brands – creating a more level playing field for the ingredient creator.

In some situations, the creation/implementation/certification of adherence to standards is important to the consumer (example: brands such as VHS and, at its inception, Intel Inside, certifying that products containing this ingredient would play Microsoft software).

Potential downsides of/Investments needed for Ingredient Branding

Ingredient branding as a multi-stage marketing process needs careful planning and accurate monitoring; if this management task is not properly done it can lead to unfortunate market situations. In addition the investment can not be underestimated:



Backlash from the user/OEM and the channel: because of some loss of control enters into the picture as the ingredient creator takes more control of communication to the end user, and end user loyalty.

Investment/Costs: There are also the real costs involved in establishing the brand identity and brand elements themselves, and the potentially very high investment downstream to create ingredient brand effects – and greater demand pull straight from the consumer.

Brand Conflicts: Existing partner relationships could jeopardize the balance of power between the partners.

In practice, the creation of downstream brand equity for the ingredient can happen in several ways, including (Baumgarth, 2001. Brownell, 1994, Bugdahl, 1996):

The ingredient creator invest separately from the ingredient users by making direct investments in communications of the ingredient brand and its benefits downstream to the consumer market or segments of the market that are important; (example NutraSweet, Intel, GoreTex, Makrolon, Microban, etc.) or

Alternatively, by working together with the ingredient user, ingredient creators using differential pricing, price off, or coop rebates can gain the support of the ingredient user in building the ingredient brand (example: Sony supporting Dolby Sound).

Value Flows/Multiple effects:

The injection of a new brand in the process of marketing down the value chain can have a myriad of effects – which sets up a rather complex “effects base,” as shown in Figure 2 (Shocker, Srivastava. and Ruekert, 1994).

As shown, effects can happen between these key players in a myriad of ways, including:

© 2006, ISBM – Penn State/ZIBS -- Emory

Ingredient Creator

Ingredient User / OEM

Value Adder / Channel(s)

Consumer / End-User of Offering

I-1 R-1

I-2 R-2

I-3 R-3

I-4 R-4

I-5 R-5

I-6 R-6

4

Fig. 2: Ingredient Branding -- Spectrum of Effects


I-1. Direct investment by the creator of the ingredient in building consumer brand equity effects through direct communication, advertising, sampling or other sorts of activity.

R-1 Is brand equity and a direct connection between the consumer and the ingredient creator – creating the anticipation to be looking for other products with ingredients from the creator, and creating direct consumer pull for offerings with the creator’s ingredients, which can be used to gain power and garner higher prices from the user and through the channel.

I-2 Can be direct investments that the creator of an ingredient provides for a user/OEM to utilize the ingredient, (also includes price concessions, or other sorts of inducements the creator might use to get the user/OEM to use and/or promote the ingredient. I2 might also include negative effects of the user feeling trapped by having to use the ingredient due to consumer demand, or other loss of control.)

R-2 Is a series of returns the user can provide to the creator, including higher prices, loyalty, deeper partnerships with the creator, the surrender of control, and limiting opportunistic sorts of purchasing practices.

I-3 Can be investments that the ingredient user makes in communicating with the consumer that the ingredient is in their product, and the value it brings. As they do this, they are actually investing in building a brand asset for themselves as users, but also building brand equity for the ingredient creator.

R-3 Can greater uptake by the consumer, driven by the benefits coming from the ingredient, including higher sales velocity, higher prices, greater loyalty, and greater propensity to advocate the product to others. This also includes brand equity effects for both the user brands and the ingredient brand.

I-4 Can be a direct investment that the ingredient user makes to the channel, informing the channel of the power of the ingredient, and to enable the channel to better sell their product including the ingredient to consumers5. For example: A variety of carpet manufacturers use “Stainmaster” fibers and chemicals, so every carpet manufacturer who helped build the value of Stainmaster actually provided an investment for other user/manufacturers who incorporated those ingredients, as the Stainmaster ingredient brand became more well known.

R-4 Is return from the channel to the user/OEM – which could mean higher prices, greater uptake, greater velocity and turn of product.

I-5 Refers to investment that the channel makes with the consumer in raising visibility of ingredient brand, as well as the user/OEM’s brand as it sells its products. This can be through a variety of market communications or other promotional activity, incentives, sampling, installation of point-of- purchase displays, etc.

5 Note that we might also count in I-4 some of the negative effects that happen as the channel has alternatives to pick up products from other user/OEM’s that incorporate the creator’s ingredients.



R-5 Represents greater channel turns and higher prices, faster uptake, brand loyalty, and the anticipation that more products with the key ingredient might become available.

I-6 Represents direct investments the creator of the ingredient might make straight to the channel – in building awareness of the ingredient and advising channel partners to be looking for products from user/OEM’s that incorporate the ingredient. By going straight to the channel, the ingredient creator would have the opportunity of gaining additional power over user/OEM’s, by creating channel pull for the product, and an incentive to the channel to look for and stock these products because of the promise of greater product turns.

R-6 Represents return to the ingredient creator through channel pressure on user/OEM’s to bring them products that use the creator’s ingredients.

Relative Brand Power

Additionally, the business of ingredient branding incorporates another potential complexity – when considering the relative power of the ingredient creator’s parent brand, the ingredient brand, and the user’s brand (Dover, 1997; Hilton, 2003; Kleinaltenkamp, 2001).

One visualization that might be used to describe a “zone,” where ingredient branding is easiest to implement – where the relative consumer equity of the user/OEM’s brand and the ingredient creator’s brand are relatively well-matched – is shown in Figure 3.


© 2005 - ISBM- Penn State 6/13/2006 60

Important Consideration: Relative Brand “Power” – Depth of Equity

Relative power of “hosting” brand

Relative power of “Ingredient” brand

Generally difficult to accomplish ingredient branding strategy

Ingredient branding strategy may not be desirable…

Zone of relative balance: Ingredient branding strategy may offer opportunity to create new value/ “Market Assets”

A.

B

C


A. Is the situation where the creator’s ingredient and brand are relatively unknown but the user’s brand is very well known. In this case negotiations will be difficult and the creator might have to provide significant concessions for getting the user to use its brand to begin building the equity in the creator’s ingredient brand.

An example of this might be Texas Instrument’s (TI) “DLP “Digital Light Processor ingredient as it was introduced6. At that time approaching a powerful user/OEM brand such as Sony, negotiations were very difficult. Sony also could explore other technology alternatives for projectors and large-screen TV’s. Negotiations were relatively easy with Proxima, a lesser known brand, to incorporate the TI-DLP in its projectors.

B. If the ingredient creator has a very powerful brand, well known by end users and trusted, and the user has a relatively unknown brand, then negotiations for uptake, pricing, utilization and build of ingredient brands and brandmarks should be fairly easy for the creator. On the other hand, the lesser known brand may be lesser known because it is entering the market, or because its products are of relatively low quality – so the creator may not choose to negotiate with those brands.

C. This is a zone where the brand equity of the creator and user are relatively in balance, and where ingredient branding negotiations are more on an “equal partner” footing. Here the dynamics and economics of the ingredient branding negotiations between the creator and the user/OEM can explore the opportunity for real brand synergy with both the market-based assets of the creator and user/OEM increasing as they work together.

Relative Relationship Power

Another approach to analyzing the space of ingredient brands and how they might be negotiated can be viewed in Figure 4.

Figure 4 outlines a “space” where the relative brand power of the user/OEM is on the horizontal axis and the relative brand power of the creator’s ingredient brand is on the vertical axis, dividing the “space” into four quadrants, and four ingredient branding strategy types.

6 Digital Light Processing™ is the world's only all-digital display chip and a key ingredient in the best digital projectors available today. DLP® technology uses an optical semiconductor to recreate source material with fidelity analog systems cannot match. Ralph Oliva has particular insights, because he initiated that successful process of ingredient branding


Fig. 3: Relative Brand Power Effects in Ingredient Branding


In moving through this space, the actual value of the increase in consumer value provided

by the ingredient also must be taken into account, and will be viewed as a very necessary part of implementing an ingredient branding strategy as we move through the quadrants.

Quadrant 1 might be viewed as a space where the ingredient creator and the ingredient users, both with low brand power, are “creating the category together.”

In this case, if the creator has come up with a high value but little known ingredient, it establishes a substantial change all the way down to the consumer, and the user’s brand is also relatively unknown, perhaps the two can be working together to open a new category. Both brands can work together to create brand equity simultaneously and synergistically in the new category.

Once again, an example of this might be TI’s DLP ingredient in Proxima projectors, or, historically, the efforts Dolby labs put into helping build portable cassette players with lower hiss through their technologies.

At the time of the introduction of “Dolby,” cassette players were relatively new and Dolby was virtually unknown. Tape players developed progressive amounts of “hiss,” adding noise to the taped signal every time the tape was played. (Remember we were at that time in the early days of utilizing an analog technology.) Dolby, by providing a technology that eliminated this, and Sony, by miniaturizing cassette players, worked together to create what became a powerful category: personal, portable, high-quality music – the forerunner of the iPod.


Low

High

Low HighRelative Power of the User/OEM Brand

Relative Power of the Ingredient Brand 1. “Creating

the Category Together”

2. “Forced Utilization”

3. Co-Branding/ Synergy

4. Ingredient Differentiation

Fig. 4: Relative Power Relationship between Ingredient Brand and User/OEM Brand


Quadrant 2 - Here the creator comes in with a relatively unknown ingredient brand, and is negotiating with user/OEM brands of high power at the point of utilization. In this case, negotiations for the creator will be difficult unless the ingredient is truly revolutionary and serves a significant un-served downstream demand hitherto unreachable by the user/OEM. If the user/OEM needs the ingredient badly enough, even an unknown ingredient can create a “Forced Utilization” situation. The ingredient creator can essentially say: If you wan this ingredient, help me build the brand for it, or you don’t get to use it.

An example of this might be NutraSweet’s negotiations with Coca Cola in developing the Diet Coke brand. NutraSweet was in a very strong position to bring its Aspertame sweetener to Coca Cola and enable them to serve a significantly large market. NutraSweet, with strong patent protection and a “killer ingredient,” was able to negotiate to get Coca Cola – and Pepsi – to adopt the NutraSweet brand mark, and basically endorse and create the market based asset for NutraSweet.

Quadrant 3 – High brand equity on the part of the creator, as well as the user/OEM.

This is a region of more co-branding and synergy – where each brand brings its own power to the end user for combined sales. An example of this might be Eddie Bauer and “Jeep.” Both of these already have strong brand associations, and the combination in natural synergy creates greater pull downstream in the market.

Quadrant 4 – High brand power for the ingredient creator and low brand power for the user / OEM. In this case the ingredient may be the only thing differentiating what essentially is – or is becoming – a commodity category populated by user/OEM brands of similar brand equity.

Here is where an ingredient creator can move into an essentially commoditized consumer category and go straight to the end user and take responsibility for de-commoditizing the category, giving it great power over the user/OEM brands and great consumer franchise and brand equity (Adams D. 1997; Dover, 1997; Kotler. and Pfoertsch, 2006.).

This will be viewed as a case of what Dupont did with Stainmaster – relatively undifferentiated carpet brands were being sold in a nondifferentiated way through a variety of channels. Dupont, by building direct franchise with the consumer – and owning that entire franchise – essentially had great power over the ingredient user/OEM’s, such as Shaw or Mohawk.

Research Needed:

The authors of this research are in early investigation of this whole area, where it appears as if little research has been done to focus on and answer such questions as (Vaidyanathan, Aggarwal, and Brown, 1999; Vaidyanathan, and Aggarwal, 2000; Park, Jun, and Shocker, 1996)Worm and Durme 2006,):



Under what conditions does an ingredient branding strategy on the part of the creator make economic sense?

Are there some guidelines for investment that can be discerned for ingredient creators to help them harvest more of a fair share for their investment in R&D, and the creation of new ingredients?

Negotiation guidelines have been developed for several ingredient brands – what are some principles by which the value of an ingredient can be equitably harvested downstream?

Are there some situations where ingredient branding should be completely avoided? Can we better understand the role of the channel in ingredient branding and how

ingredient creators and user/OEM’s alike can work with channels to mobilize the power often inherent in ingredient brands?

Is there a better “framework” for categorizing different ingredient branding approaches?

These and other questions will be investigated to better understand the relationship between ingredient and the overall brand strategy. The benefits of using an ingredient brand as a point-of-entry or band extension for a product category is just one way to use the power of ingredient branding. The limited versatility of some ingredient brands may also limit the use of the overall concept. It is therefore necessary for ingredient branding to develop a clear understanding of the conceptual boundaries and not only become another item on the marketing strategy menu. Today there are numerous examples of continued use of ingredient branding taking place – from BAYER’s Makrolon polycarbonate resins to Danone’s pro-biotic yogurt drinks. Many more will come, and they will need guidance.



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XF1-InsightsOnIngredientBrandingSmeal11-20-09