Does design matter for markets?

This article concerns the intriguing appointment of a chief design officer at pharmaceutical giant Johnson and Johnson, known to most for us for consumer products such as Band Aid, Lisertine and Tylenol, but owing its $275 billion market capitalisation to the 80% of revenues that derive from pharmaceuticals and medical devices.

The appointment of Ernesto Quinteros, announced on March 20 2014, signals a board-level belief that great design wins market share. But it's not just looking pretty that counts - it is the melding of design to functionality that drives sales.

In the prescription drugs area, the zeitgeist is for product and packaging design that delivers health benefits: handy packs that remind patients when to take a pill (eg, bottles that light up at dose time) or that they already took one (eg, tear strips), or smart pills that sense serum levels of active drug and adjust reminders accordingly. One of the biggest problems in healthcare is that many patients simply don’t take their medication, particularly those on multiple pills (who are often elderly and forgetful). While I have not seen an economic analysis of the impact of forgetful patients on drug company revenues, one useful byproduct of well-disciplined patients is that they consume more pills, which creates more frequent repeat prescriptions.

Market theorists explain the correlation between design, brand value and market-to-book ratios of US consumer products companies as deriving from an “economic moat”, in which design helps to protect branded companies from competition. Interbrand has quantified the value of this effect, proposing that it explains, for example, as much as 13% of Apple’s industry outperformance in sales.

However, while there is broad consensus that design/branding supports market value in consumer products companies, these findings do not apply equally across all industries. For example, a 2012 study by Colleen Kirk in the Journal of Brand Management found that in industrial companies, this relationship is much more tenuous. Comparing industrial companies such as Accenture, Caterpillar, Cisco and GE to consumer products companies such as Coca-Cola, Colgate Palmolive and Disney, the relative impact of design/branding was significantly different.

Perhaps unsurprisingly, industrial companies seem to be less affected by design and branding than their consumer products cousins. In industrial sectors company perception factors such as pricing, infrastructure, balance sheet, service and support were much more important for sales than product perception. 

This industry sector distinction for the relationship between brand equity and market performance is not picked up by traditional brand equity methodology. Therefore, there seems to be great value for those professional/financial service or industrial companies which can figure out how design/branding spend can translate into higher-quality sales/sticky customers. While brand initiatives are commonplace (witness PwC Consulting’s disastrous £75 million re-launch as Monday or British Airways' successful migration to BA), I am hard pressed to find a services or industrial company that has succeeded to the extent that its brand equity has tangibly affected longer-term stock price. If anyone out there has some suggestions, I would love to hear them.

When writing this article, I ran the last five years' stock market performance of the world's top 10 'meaningful' brands (as defined by HAVAS) against the Bloomberg World Index (see graph below). The companies studied were Google, Samsung, Microsoft, Nestlé, Sony, Ikea, Dove, Nike, Wal-Mart, Danone, Procter & Gamble and Philips. The results were inconclusive, with as many brands above the line as below and a lot of volatility. 

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My conclusion? Just as for my previous research into patents and R&D spend, trying to tie single factors to corporate performance over the medium (five-year) term is not a great investment strategy. Markets are unfortunately more complex than that. Perhaps the notion of great branding driving performance is a rationalisation of survivor bias. After all, those great brand ideas that failed are not part of the analysis.