Nokia Brand Valuation

Praxis Business School Assignment on Brand Tracker for Nokia: Stage 3

A report Submitted to Prof. Srinivas Govindrajan

In partial fulfillment of the requirements of the course Product and Brand Management

On September 19, 2008 By Arihant Singhi

B07009

Richika Sureka

B07032

Rohit Bhardwaj

B07034

Varun Mittal

B07046

Executive Summary

2

Executive Summary “Nokia: Expressive, Human, Storied, Emotional, Consistent” Long-term solid growth and dominance are determined by myriad factors of markets, marketing, product development, partnerships and alliances and, not-least-of-all, vision. In sectors that are driven largely by technology and research, brands play a vital role in translating a company’s technical competencies into market success. Effective management of brands is therefore an increasingly important element of business strategy and determinant of the valuation accorded to a business by investors. Nokia has been steadily working on its corporate brand name and the management of consumer perceptions over the last few years. Its efforts have paid off. Nokia has succeeded in lending personality to its products, without even giving those names. It has not created any sub-brands but has concentrated on the corporate brand. Only numeric descriptors are used for the products, which do not even appear on the products. Such is the strength of the corporate brand. “Valuation is neither the science that some of its proponents do not make it out to be nor the objective search for true value that idealists would like it to become. The models that we use in valuation may be quantitative, but there is a great reliance on subjective inputs and judgments. “Thus the final value that is obtained from these models is colored by the bias that we bring into the process.” Nokia brand value has always been in the World Top10 position since early 2000’s, which is vouched by the valuation results by Brandz and Interbrand. The Book to Market Model gives a valuation of Nokia which at 65274 million Euros. The model helps us to understand the strength of the company’s brand. The Price Premia Model shows brand premium of Nokia which is 45.32%. Thus, Nokia has the ability to charge a premium of about 45% for the same product vis-à-vis unbranded or equivalents which shows that its marketing and branding strategy has reaped its fruits. The Brand Value Added Model gives a valuation of Brand Nokia which is 27112 million Euros. The model provides an accurate assessment of the value of the brand in use. This information is useful for making investment decisions related to brand renewal and positioning. A strong correlation exists between the brand value and the innovation factor, i.e. their innovative efforts were correctly communicated and have led to successful creation of Brand. What makes the difference between the most successful and less successful brands? It certainly is not what product features are offered. How, then, do consumers choose? The answer seems to be what the brand names mean to them.

“Brand value is very much like an onion. It has layers and a core. The core is the user who will stick with you until the very end.” Brand Tracker: Stage 3

Product and Brand Management

Contents

3

Contents Stage 3 – Brand Valuation............................................................................................................... 4 Introduction .................................................................................................................................... 5 Book to Market Model .................................................................................................................... 7 Price Premia Model....................................................................................................................... 12 Discounted Cash Flow Model ....................................................................................................... 16 Net Take Away .............................................................................................................................. 23 References .................................................................................................................................... 25 Bibliography .................................................................................................................................. 26 Annexure ....................................................................................................................................... 27

Brand Tracker: Stage 3

Product and Brand Management

4

Brand Valuation

Brand Valuation

STAGE 3 – BRAND VALUATION

Brand Tracker: Stage 3

Product and Brand Management

5

Introduction

Introduction Mobile Market It took the fixed telecommunications network 125 years to reach 1 billion subscribers, but it only took around 20 years for the cellular mobile industry to reach the same number of subscriptions and overtake the number of fixed phones in 2002. Even more remarkably the global mobile total had reached 2 billion in late 2005, and 3 billion at late 2007. Mobile subscriptions now equate to half the world’s population and there is every indication that the 4 billion mark will be reached by the end of 2009! While mobile statistics are complicated by the use of “connections” and “subscriptions” rather than actual “users” or “subscribers”, which can lead to numbers 10-20% greater due to users having multiple subscriptions and the inclusion of inactive pre-paid users, there can be little doubt that wireless access is taking over the Telecom World. Mobile phones have been particularly effective in improving telecommunications in developing countries, which previously had limited reliable means to communicate, and most developed markets are nearing saturation with some reaching more than 100% penetration based on “connections/ subscriptions”.

Source: Informa Telecoms and Media Global Mobile Subscriptions-November 2007

With over 6 billion potential users (90% of the world’s population) within the coverage areas of existing terrestrial cellular networks, the global penetration of reachable users is currently only around 55% so there is plenty of growth potential in the developing world, if appropriate cost structures can be achieved. Wireless access clearly offers a very promising technology to address the Digital Divide. Brand Tracker: Stage 3

Product and Brand Management

Introduction

6

Valuation Brand value is defined as the net present value of future earnings generated by the brand alone. Brands influence customer choice, but the influence varies depending on the market in which the brand operates Intangible assets are crucial to business value and growth and it is important that they are identified alongside the tangible assets and valued as individual components. From a shareholder’s perspective, the value of a brand is equal to the financial returns that the brand will generate over its useful life. Any financial returns attributed to a brand must be discounted to account for market uncertainty and assetspecific risks. These two principles apply to the valuation of all assets, not just brands. Brand valuation is a powerful process that captures the present and future value of a brand. Brand valuation determines how the brand creates value and aligns with customer’s drive for purchases. Brand valuation becomes a means of communicating about brand and marketing strategy in shareholder value terms, both internally and externally. Uses of Brand Valuation Mergers and Acquisitions

Rarely will a corporation pay book value to acquire another business entity. The difference between book value and the acquisition price paid is called goodwill. Goodwill is often defined as the value of a business entity not directly attributable to its tangible assets and/or liabilities. Estimating the financial value of a brand helps determine the premium over book value that a buyer should pay.

Licensing

One of the ways to cash in on the equity of a strong brand is by extending or licensing the brand. It is possible for both the licensor and the licensee to benefit economically from a licensing arrangement. The licensor benefits from a new source of revenue that requires little capital investment. The licensee benefits by having lower channel, advertising and customer acquisition costs.

Financing

While corporations do not carry brands on their balance sheets as longterm assets, financial markets recognize the contribution brands have on shareholder value. Companies with strong brands regularly obtain better financial terms than companies with poor brands. The higher the value of the brand, better the terms.

Brand Tracker: Stage 3

Product and Brand Management

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Book to Market Model

Book to Market Model

BOOK TO MARKET MODEL

Brand Tracker: Stage 3

Product and Brand Management

Book to Market Model

8

Book to Market Model Introduction Book to market model embraces the intangible asset that the company possesses as Brand Value, is calculated by deducting Market Value of company with the Book Value. Nokia Brand valuation includes the contribution of its brand-intangible asset. It embellishes in their financial statements and by Book to value method we can measure the performance and management of brands over last five years.

Rationale for choosing Book to Market Model For most of the century, tangible assets were regarded as the main source of business value. These included manufacturing assets, land and buildings or financial assets such as receivables and investments. They would be valued at cost or outstanding value as shown in the balance sheet. Categories of Intangible asset that support the superior market performance of business are:  Knowledge Intangibles: for example patents, software, recipes, specific knowhow, including manufacturing and operating guides and manuals, product research etc.  Business Process Intangibles: These include unique ways of organizing the business including innovative business models, technology, R&D, patents, flexible manufacturing techniques etc.  Brand and Relationship Intangibles: These includes trade names, trademarks and trade symbols, domain name, design rights, logotypes, associated Goodwill general predisposition of individuals to do business with brand are included.  Market position intangibles: for example, retail listings and contracts, distribution rights, licenses such as landing slots, production or import quotas, third generation telecom licenses, government permits and authorizations and raw materials sourcing contracts. Nokia possesses Next Gen. mobile phone technology, Fashionable designs handsets and low-cost models for the developing world; to calculate value of its intangible asset the Brand value we used Book to Market value model. Nokia, a single brand company has shown tremendous brand strength and people regard the brand. Since the brand is so famous we wanted to check out the book value and difference between its Book value vis-à-vis Market value.

Brand Tracker: Stage 3

Product and Brand Management

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Book to Market: Valuation

Book to Market: Valuation Objective To measure the brand value of Nokia using Book to Market Model, estimating the total financial value of the brand. The brand valuation is done on yearly basis. Methodology In Millions of Euro 2003

2004

2005

2006

2007

Total Number of Shares

4,761

4,593

4,366

4,063

3,885

Share Price, EUR (HSE)

14.12

12.84

13.20

15.97

20.82

Market Cap

67,227.01

58,976.69

57,625.26

64,883.40

80,894.24

Book Value (Equity + R&S)

18,420.00

12,387.00

12,761.00

14,674.00

15,620.00

Market Value

67,227.01

58,976.69

57,625.26

64,883.40

80,894.24

Value of Brand = MV – BV

48,807.01

46,589.69

44,864.26

50,209.40

65,274.24

Value according to Interbrand

26,285.71

20,034.17

21,861.16

23,539.84

24,595.62

Under this method we have tried to study strength of the company’s brand. Nokia is one of the top recognized brands in the world, and it is the least expensive large capitalization technology stock, The Company has a rock solid balance with $10 billion in cash. This lay foundation to large intangible assets and being a standalone brand we thought of taking Book to Market Model. Under this model we totaled the Equity part and added Reserves and Surplus then calculated the market capitalization by multiplying average price during the year Listing HSE (Helsinki Stock Exchange) to calculate market value and henceforth we subtracted market value with Book value, the figures given in EURO Millions. The difference between the Market Value and Book Value gives us Value of Intangible asset or Brand Value of Nokia. From research findings journals and reports, we got the Market capitalization and compared that value with our method and the values were then converted according to exchange rates of previous respective years.

Brand Tracker: Stage 3

Product and Brand Management

Book to Market: Valuation

10

Limitations In this approach we have derived earnings that arise from the brand. At the end of the forecast period, if it has been determined that the brand’s useful life will exceed the period of the forecast, that is perpetuity value. Also drawback of this method is trying to determine what part is attributable to brand and not other intangible factors. It also fails to take any balance sheet implications into consideration only the Equity and reserves are being source of Book Value. If we compare our Brand value with Interbrand’s value we see a difference in both the values which can be because Interbrand’s determines the earnings from the brand and capitalizes them after making suitable adjustments whereas we have just taken book figures which were easy to conceptualize. The brand is the most loved and admired brand in the world and is perceived differently in different nations. Observations Nokia being leader in design innovation and creativity has emerged as highly ranked brand across the world. The Brand value has grown from year 2005 and has been increasing there after. The reasons for this could be their belief in Innovation and to create a brand for every segment of society, be it common man or a high income class corporate. The value proposition offered and right positioning has led to creation of most loved and admired brand in the world- Brand Nokia. Conclusion Above-the-line advertising along with newer forms of brand communication has created the difference in effectively positioning Nokia as a brand in minds of consumers. Relevance to customer base by the spread of brand communication through mediums such as entertainment and increased product placement helped the brand to associate with its customers. The non-brand market share is the factor of company’s share of patents and research and development (R&D) share. The market share attributable to the brand is a function of relative advertising share and perceived value derived out of brand along with product offering.

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Product and Brand Management

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Price Premia Model

Price Premia Model

PRICE PREMIA MODEL

Brand Tracker: Stage 3

Product and Brand Management

Price Premia Model

12

Price Premia Model Introduction In the price premium method, the value of a brand to charge a premium over an unbranded or generic equivalent can be tracked. The ultimate purpose of the brand is to secure future demand. The value generation of these brands lies in securing future volumes rather than securing a premium price. The major advantage of this approach is that it is transparent and easy to understand. It is possible to determine the market share for a given product at a given price level. The relationship between brand equity and price is easily explained. For a brand, the model gives the percentage of premium it can charge its consumers over the generic substitutes. The brands can even compare their value of the brand vis-à-vis competition. Rationale for choosing Price Premia Model The premise of the price premium approach is that a branded product should sell for a premium over a generic product. The value of the brand is therefore the discounted future sales premium. The ability of a brand which is an intangible asset is tested. By taking out the brand value, the managers can actually track the performance over time and in case of insolvency, the brand could act as the most saleable asset. A strategic buyer is often willing to pay a premium above the market value. This may be a result of synergies that they are able to develop which other buyers may not be able to achieve. When an asset is valued, in the absence of a written offer from the strategic buyer, it cannot be assumed that a buyer will appear and be prepared to pay a premium price. Each case has to be evaluated on individual merit, based on how much value the strategic buyer can extract from the market as a result of this purchase, and how much of this value the seller will be able to obtain from this strategic buyer. The reason for testing this model is Nokia is serving in a category which is undifferentiated; the value of a brand will actually signify Nokia’s presence in the category. Limitations of Price Premia Model The disadvantages are where a branded product does not command a price premium; the benefit arises on the cost and market share dimensions. The model may bear little evidence to economic reality or serve other useful purpose. This method is flawed because there are rarely generic equivalents to which the premium price of a branded product can be compared. The price difference between a brand and competing products can be an indicator of its strength, but it does not represent the only and most important value contribution a brand makes to the underlying business.

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Product and Brand Management

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Price Premia: Valuation

Price Premia: Valuation Objective To measure the brand value of Nokia using Price Premia Model Methodology A sample of 30 mobile users was taken for the purpose of evaluation. The respondents were asked to state the price they would think to pay if a low- end; mid market and premium unbranded mobile is launched. Then they are asked to quote a price for the same phones with brand names attached to it for the entire three segments namely low end, mid market and premium mobiles. Limitations The survey was carried out among the students of Praxis Business School, Kolkata due to limited resources. Data Collection Of the 30 respondents, 7 were girls and 23 were boys. The respondents were in the age group of 21-25 years and were the users of mobile handsets.

Gender

Age 25 years 7%

21 years 13%

24 years 20%

Female 23%

22 years 27%

Male 77%

23 years 33%

Findings Low End Phone

Unbranded

Sony Ericsson

1000.00

3836.67

4466.67

3350.00

3171.67

Price Premium

284%

347%

235%

217%

No. of Buyers

3

23

3

1

Avg. Price

Brand Tracker: Stage 3

Nokia

Motorola

Samsung

Product and Brand Management

14

Price Premia: Valuation Midmarket Phone

Unbranded

Sony Ericsson

Avg. Price

5000.00

6676.66

7236.67

6181.67

5955.00

Price Premium

34%

45%

24%

19%

No. of Buyers

6

22

1

1

Motorola

Samsung

High End Phone Avg. Price

Unbranded 10000.00

Sony Ericsson

Nokia

Nokia

Motorola

Samsung

13833.33

14650.00

12850.00

12403.33

Price Premium

38%

47%

29%

24%

No. of Buyers

14

15

1

0

Data Analysis and Interpretation Low End Phone:

The price of the unbranded new low end phone was kept at a constant of Rs 1000. The respondents said that they were willing to pay a price of Rs 4466.67 to buy the same phone if Nokia had come up with the new product. Nokia has targeted and serviced the low end segment because for a majority of people, the mobile phone is just a utility. The percentage of premium Nokia can charge its customers is 347%. The closest competition is Sony Ericsson which is gradually increasing its market share and with the product attributes it is gaining confidence from customers and they are ready to pay a premium to purchase a Sony Ericsson mobile phone. The percentage of premium customers are willing to pay is 284%. Nokia is concentrating on very low ends of the market as growth slows in the saturated regions of the world. The cheapest of the seven new phones from Nokia, is designed to support entrepreneurs in rural areas primarily in developing markets who may want to run a business by sharing the phone with neighbors. Low end phones will give a good margin as they are targeted to mature markets. Midmarket Phone:

The price of the unbranded new midmarket phone was kept at a constant of Rs 4000. The respondents said that they were willing to pay a price of Rs 7263.67 to buy the same phone if Nokia had come up with the new product. This was followed by Sony Ericsson, Motorola, and Samsung. Nokia also had the highest number of consumers. It also commands the highest premium in this category. The percentage of premium which the customers are willing to pay for Nokia is 48%. The reason for which Nokia enjoys such a share is because they try and provide the similar features in comparison with competition but the customers still wants to pay a higher price because of “ Legacy” which is the trust it has built in the minds of the customers for itself. The world mobile market is witnessing a slowdown in demand for midmarket phones and will continue to drop even more in the future as mobile companies are coming up with premium phones at the price of midmarket phones to attract more consumers. Midmarket phones use closed operating systems, so Brand Tracker: Stage 3

Product and Brand Management

15

Price Premia: Valuation

new software can’t be added to the devices.. As the market for such software has begun to grow, there’s been a surge in new applications. Consumers today can use their phones to watch videos, catch up on Major League Baseball scores, or blog from pretty much anywhere. Premium Phone:

The price of the unbranded new midmarket phone was kept at a constant of Rs 10000. The respondents said that they were willing to pay a price of Rs 14650 to buy the same phone if Nokia had come up with the new product. This was followed by Sony Ericsson, Motorola, and Samsung. Nokia also had the highest number of consumers. Sony Ericsson has catered to the premium segment in a good fashion with the introduction of music enabled phones, touch screen phones. Nokia is already gearing up. The Finnish company, which is the largest maker of mobile phones in the world, is busily developing phones to meet high-end demand. Its most advanced phones let people play music, take videos, manage their email, and navigate through foreign cities with street-by-street guides. Calculation of Brand Value for Nokia

Market Share Low Medium High

16% 74% 10%

Weighted Avg. Price Commodity Nokia 160 715 2960 5355 1000 1465 7534.8

Revenue Brand Value (Revenue * Premium %age)

Weighted Avg. premium Premium Premium %age 555 2395 465 3155 45.32%

51058 23139.68

The market share is divided in three segments, low end mobile has a 16% share in the total world mobile market, the midmarket has 74% and the premium segment has a 10% market share. The forecasted demand from the industry is midmarket phones are expected to account for 23% of sales, while low-end phones would be 46% and premium would be 31%. The group calculated the weighted average price of the commodity and Nokia phones if they come up with new phones as we had the percentage contribution of all the three segments to mobile market. The weighted average price for Nokia is Rs 7534.8. The premium is the difference which the consumer is ready to pay for Nokia and the unbranded commodity for all the three segments. The weighted average premium is calculated by apportioning the premium for every segment with its market share. The weighted average price premium is Rs 3155. The brand value is weighted average premium by weighted average of Nokia. Therefore, the brand value of Nokia is 45.32% which means that Nokia can charge a premium of about 45% for the same product vis-à-vis competition. For Nokia, brand value becomes a means of communicating about brand and marketing strategy in shareholder value terms, both internally and externally.

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Brand Value Added Model

Brand Value Added Model

BRAND VALUE ADDED MODEL

Brand Tracker: Stage 3

Product and Brand Management

Brand Value Added Model

17

Introduction This approach measures the free cash flows and discounts these over an explicit forecast period and the continuing value beyond this point. This method is particularly useful where the brand represents a significant proportion of the assets of a business, as separation of economic benefits and cash flows is made easier. The advantage of this method over the capitalization of profit differentials method is that discount rates are applied to the cash flows generated in each year as opposed to capitalizing the economic benefits measured in a single period and which are assumed to be maintainable in perpetuity. The discount rate chosen would need to represent the risks associated with the brand. To the extent that the brand constitutes a major proportion of the assets of a business, the discount rate should be fairly similar to the weighted average cost of capital (WACC) determined for the business itself. An advantage of this method is that it would provide an accurate assessment of the value of the brand in use. This information is useful for making investment decisions related to brand renewal and positioning. The capitalization rate is usually selected on the basis of the rate of return that a prudent investor would require, given the future growth prospects and risks associated with the business or brand being invested in. The capitalization rate would be based on the Weighted Average Cost of Capital (WACC) and anticipated nominal growth rate. The WACC represents the average cost of equity and debt financing weighted by the respective proportions of these sources of finance. The average costs would represent the opportunity costs associated with these sources of finance and indicate the returns required by debt and equity providers as compensation for providing these sources of finance to the business, in the specified proportions and being exposed to associated business risks. The focus is on the return earned as a result of owning the brand – the brand’s contribution to the business, both now and in the future. This framework is based on a discounted cash flow (DCF) analysis of forecast financial performance, segmented into relevant components of value. The DCF approach is consistent with the approach to valuation used by financial analysts to value equities and by accountants to test for impairment of fixed assets (both tangible and intangible) as required by new international accounting standards.

Brand Tracker: Stage 3

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Brand Value Added Model Objective To measure the brand value of Nokia using Discounted Cash Flow Model Methodology This method consists of four work streams:  Financial forecasts  Risk factor i.e. WACC calculation  Brand Value Added (BVA) - analysis of the brand's contribution to demand  Company & Brand Valuation

I.

Financial Forecasts

Typically, explicit forecasts for periods of 5-10 years are used for the basis of such valuations and should be identical to internal management planning forecasts. An important part of the brand valuation process involves ensuring that forecasts are credible. Forecast Revenue If the valuer is to estimate likely future sales of the brand, it is vital to understand the historical data relationships that have affected the performance of the brand in each of its markets. This may be based on observation, market research, correlation or regression. This can involve econometric modeling or some other form of statistical analysis of past performance to show how certain causal variables have affected revenues. This is of vital assistance in building the business case or cases on which brand valuations are based. Such analysis gives credibility to the underlying assumptions. It creates the framework within which dynamic and option valuations can be based. One of the key issues in terms of branding is to understand the causal relationship between total marketing spend, pricing and sales results. It is equally important to understand the relative effect of different media on the overall level of sales. The task of the brand valuation team is therefore to ensure that brand and marketing factors are being accounted for properly in the modeling and analysis taking place, and that results are used to obtain the most appropriate forecast sales values. Forecast costs It is necessary to understand fully the basis on which forecast costs have been determined. The brand valuation team will need to confirm that the basis of cost allocation is sensible between each of the geographic, product or customer segments on a current and forecast basis. The same principle applies to the allocation of capital to different segments and the resulting charges for capital made against the segmented brand earnings streams to arrive at forecast Economic Value Added. Economic Value Added is the starting point for the brand valuation. A proportion of the identified Economic Value Added is ultimately attributed to the brand in the brand valuation calculation.

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Brand Value Added Model

II.

Risk factor (Discounting Factor) i.e. WACC calculation

The next step in the brand valuation is to determine the appropriate discount rate to use in the DCF analysis. We have used an approach to discount rate determination, which is an adaptation of the Capital Asset Pricing Model. We build up the appropriate discount rate from first principles as follows: Discount rate (WACC i.e. weighted average cost of capital) = (Ke * equity + kd * debt)/ capital employed Where, Ke = Cost of equity Kd = Cost of financing Debt Equity is the market cap Debt is the book value of debts employed Capital employed = Equity + Debt To calculate Cost of Equity i.e. Ke, we took the total risks attached with the brand i.e. the beta of the sector and the beta of the company to arrive at Ke. Ke = Rf + s * c (Rm-Rf) Where, Rf = risk free rate Rm = market rate s = beta of the sector c = beta of the company The cash flows forecasted would be discounted with the wacc to arrive at the present value. This discounting factor contains the risk attached as it takes into account both the sector beta as well as company beta.

III.

Brand Value Added (BVA) - analysis of the brand's contribution to demand

This is the heart of any valuation, as it determines the proportion of total Economic Value Added to be included in the brand valuation. This is the proportion of the total revenue attributed to the intangible assets such as goodwill, brand name etc. The BVA factor is calculated by taking into factor the drivers of demand. The parameters or factors which affect the demand are taken into account and than a survey is conducted in which all the respondents are asked to award points to the demand drivers on a scale of 100. The following are the demand drivers taken in our model. Brand Tracker: Stage 3

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Brand Value Added Model        

Brand Name Promotional Schemes Advertising Product features Availability i.e. distribution CRM Technology Price

The weighted score is than calculated to find the contribution of each demand drivers. From here, we take the net contribution of a parameter Brand name which is multiplied with the value of the company to find the brand value i.e. the value contributed only by the brand name. The survey was carried out among the students of Praxis Business School, Kolkata, to find out to find out the perceived proportion of the total expense attributed to the intangible assets such as technology, brand name etc. The findings of the survey could be skewed towards the brands available in this part of the world.

Survey Findings Price 17% Technology 13% CRM 2% Availability 2%

IV.

Brand Name 38%

Features 24% Advertisement 2%

Promotional Schemes 3%

Company & Brand Valuation

To arrive at the value of the company the future cash flows are discounted to find the present value. And the terminal value is added to it. The terminal value is the value taken at the end of the forecasted period assuming the growth to be same after that year. Thus, the company value is arrived, which when multiplied by the calculated BVA Index gives the Brand Value. Brand Tracker: Stage 3

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Brand Value Added Model

Calculations Nokia: Profit & Loss

Valuation Date 0

Year Ending

12/31/2007

Revenue Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin. Research & Development Other Operating Expenses Total Operating Expense Operating Income Interest Expense Interest/Invest Income Interest Income(Exp) Net Income Before Taxes Provision for Income Taxes NOPAT Discount Rate NPV (1-6 years) Long term growth rate NPV of Terminal Growth Value of the Firm BVA Index Brand Value (in million Euros) (in million Dollars) Brand Tracker: Stage 3

19%

Estimated (In Millions of Euro) 3

1

2

12/31/2008

12/31/2009

12/31/2010

5

12/31/2011

12/31/2012

51,058.00 51,058.00 33,781.00 17,277.00 5,544.00 5,636.00 (1,888.00) 43,073.00 7,985.00 283.00 283.00 8,268.00 1,522.00 6,746.00

61,269.60 61,269.60

73,523.52 73,523.52

88,228.22 88,228.22

105,873.87 105,873.87

127,048.64 127,048.64

61,269.60 6,468.77 6,918.85 (669.00) 52,149.63 9,119.97 (49.40) 362.60 313.20 9,433.17 3,112.95 6,320.22

73,523.52 7,762.52 8,302.62 (802.80) 62,579.56 10,943.96 (46.28) 355.32 309.04 11,253.00 3,713.49 7,539.51

88,228.22 9,315.03 9,963.14 (963.36) 75,095.47 13,132.75 (35.14) 330.18 295.05 13,427.80 4,431.17 8,996.63

105,873.87 11,178.03 11,955.77 (1,156.03) 90,114.56 15,759.31 (34.16) 321.62 287.46 16,046.76 5,295.43 10,751.33

127,048.64 13,413.64 14,346.92 (1,387.24) 108,137.48 18,911.17 (33.00) 330.54 297.55 19,208.72 6,338.88 12,869.84

6,746.00

5,305.32

5,312.52

5,321.28

5,337.99

5,363.74

33,386.85 5% 37,959.92 71,346.77 38%

1.37

4

27,111.77 37,143.13 Product and Brand Management

22

Brand Value Added Model Assumptions

Till 2012 Growth

20%

Expenditure ratio

85%

Selling & Distribution

11%

Research & Development

11%

Tax Percentage

33%

WC ratio

28%

WACC

25%

Justification of Assumptions Parameters

Rate

Justification

Discount Rate

19%

This is the risk factor which has been found out by way of

Long term growth rate

5%

Estimated growth rate from knowyourmobile.com

BVA Index

38%

This was found out by way of surveying 30 mobile users

Euro-USD conversion rate

1.37

As on December 31st, 2007

Growth

20%

CAGR over past 5 years

Expenditure ratio

85%

As a %age of average revenue over past 5 years

Selling & Distribution

11%

As a %age of average revenue over past 5 years

Research & Development

11%

As a %age of average revenue over past 5 years

WACC

25%

Calculated WACC as described in the Methodology

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Net Take Away

Net Take Away

Brand Valuation of Nokia under different models Valuation date : 31st December, 2007 Model

Denomination: In Million Euros Source

Brand Value

Secondary

24596

Book to Market

Primary

65274

Price Premia

Primary

23139

Brand Value Added Model

Primary

27112

Interbrand

Interbrand’s valuation for Nokia shows that it has a brand value of 24596 million Euros. The group tested three models of valuation. The book to market model shows that Nokia has a brand value of 65274 million Euros. This approach has numerous advantages in that it recognizes that it is based on empirical evidence. The shortcomings are that it assumes a very strong state of the efficient market hypothesis (EMH), and that all information is included in the share price, number of shareholders, total equity of the company. The Price Premia Model reflects a valuation of 23139 million Euros which is around 45% of total value of Nokia. The disadvantages of this model are where a branded product does not command a price premium, the benefit arises on cost and market share dimensions. The Brand Value Added Model reflects the brand value of Nokia to be 27112 million Euros. The advantages of this approach is that it is widely accepted and it takes all aspects of branding into account; by using the economic profit figure all additional costs and all marketing spend have been accounted for. Here two valuation bases are muddled. On the one hand there is an “in use” basis and on the other hand, there is an “open market” valuation. The appropriate discount rate is very difficult to determine as parts of the risks usually included in the discount rate have been factored into the Brand Index score. Even the appropriate rate for the capital charge is difficult to ascertain. No single approach will give all the answers to a correct valuation. The starting point is to understand the purpose of the valuation and what benefits the brand delivers. Due to a lack of transparency of the workings and the underlying assumptions, some firms are not prepared to accept brand equity valuations. Provided that information on the assumptions is made available to firms, they can make their own judgments on what the correct value should be.

Brand Tracker: Stage 3

Product and Brand Management

Net Take Away

24

Recommendation When management is embarking on an exercise to value their organization’s brands, it is recommended that they do the following: Management must firstly understand the nature of their firm’s intangible assets. If one of the organization’s intangible assets is marketing related, they must determine on what attribute the brand derives its benefit. The purpose of the valuation must then be determined. A method must then be chosen that meets management’s needs in terms of the attribute it measures, the information requirements and the model’s shortcomings. Management must also ensure that an appropriate discount rate, growth rate and useful life are used. They must ensure that the model used is robust enough to deal with the peculiarities of the organization. A key issue is to check and question the underlying assumptions. Lastly, management should ensure that the mathematical calculations have been done correctly.

Brand Tracker: Stage 3

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References

References

REFERENCES

Brand Tracker: Stage 3

Product and Brand Management

26

Bibliography

Bibliography Primary Price Premia Model

The interviews were carried out among the students of Praxis Business School, Kolkata.

Secondary en.wikipedia.org/wiki/Nokia www.nokia.com/ www.nokia.com/NOKIA_COM_1/About_Nokia/Sidebars_new_concept/Annual_Accounts_2007/Nokia%2 0in%202007.pdf www.knowyourmobile.com/blog/8640/nokia_takes_a_40_share_of_world_mobile_market.html www.reuters.com/finance/stocks/ratios?symbol=NOK.N#growth www.bankofcanada.ca/cgi-bin/famecgi_fdps www.unit-conversion.info/currency.html www.businessweek.com/technology/content/jul2008/tc2008079_912540_page_2.htm www.pcworld.com/article/124529/highend_mobile_phones_prove_popular.html www.brandchannel.com/brand_speak.asp?bs_id=193

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Annexure

Annexure Annexure 1: Profit and Loss Account: Nokia Nokia: Profit & Loss, Source: Reuters Year Ending Revenue Other Revenue Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin. Research & Development Other Operating Expenses Total Operating Expense Operating Income Interest Expense Interest/Invest Income Interest Income(Exp) Net Income Before Taxes Provision for Income Taxes NOPAT

Brand Tracker: Stage 3

Actual (In Millions of Euro) 12/31/2003 29,533.00 29,533.00 17,325.00 12,208.00 3,292.00 3,788.00 84.00 24,489.00 5,044.00 (65.00) 399.00 334.00 5,378.00 1,697.00 3,681.00

12/31/2004 29,371.00 29,371.00 18,179.00 11,192.00 3,175.00 3,776.00 (181.00) 24,949.00 4,422.00 (102.00) 481.00 379.00 4,801.00 1,446.00 3,355.00

12/31/2005 34,191.00 34,191.00 22,209.00 11,982.00 3,570.00 3,825.00 (52.00) 29,552.00 4,639.00 (40.00) 373.00 333.00 4,972.00 1,281.00 3,691.00

Product and Brand Management

12/31/2006 41,121.00 41,121.00 27,742.00 13,379.00 3,980.00 3,897.00 14.00 35,633.00 5,488.00 (40.00) 277.00 237.00 5,725.00 1,357.00 4,368.00

12/31/2007 51,058.00 51,058.00 33,781.00 17,277.00 5,544.00 5,636.00 (1,888.00) 43,073.00 7,985.00 283.00 283.00 8,268.00 1,522.00 6,746.00

28

Annexure Annexure 2: Balance Sheet: Nokia In Millions of Euro Total Current Assets Property/Plant/Equipment, Total - Net Goodwill, Net Intangibles, Net Long Term Investments Note Receivable - Long Term Other Long Term Assets, Total Total Assets Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Long Term Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock - Common Other Equity, Total Total Equity Total Liabilities & Shareholders' Equity

Brand Tracker: Stage 3

12/31/2003 20,083.00 1,566.00 186.00 722.00 197.00 354.00 812.00 23,920.00

12/31/2004 19,508.00 1,534.00 90.00 487.00 369.00 681.00 22,669.00

12/31/2005 18,951.00 1,585.00 90.00 471.00 439.00 63.00 853.00 22,452.00

12/31/2006 18,586.00 1,602.00 532.00 549.00 512.00 19.00 817.00 22,617.00

12/31/2007 29,294.00 1,912.00 1,384.00 2,736.00 666.00 10.00 1,597.00 37,599.00

Average 21,284.40 1,639.80 456.40 993.00 436.60 89.20 952.00 25,851.40

2,919.00 2,468.00 387.00 84.00 2,422.00 8,280.00 20.00 241.00 164.00 67.00 8,772.00 288.00 2,272.00 14,046.00 (1,373.00) (85.00) 15,148.00 23,920.00

2,669.00 2,604.00 215.00 2,488.00 7,976.00 19.00 179.00 168.00 96.00 8,438.00 280.00 2,366.00 13,733.00 (2,022.00) (126.00) 14,231.00 22,669.00

3,494.00 3,320.00 377.00 2,479.00 9,670.00 21.00 151.00 205.00 96.00 10,143.00 266.00 2,458.00 13,132.00 (3,616.00) 69.00 12,309.00 22,452.00

3,732.00 3,493.00 247.00 2,689.00 10,161.00 69.00 205.00 92.00 122.00 10,649.00 246.00 2,707.00 11,109.00 (2,060.00) (34.00) 11,968.00 22,617.00

7,074.00 6,611.00 898.00 173.00 4,220.00 18,976.00 203.00 963.00 2,565.00 119.00 22,826.00 246.00 644.00 17,192.00 (3,146.00) (163.00) 14,773.00 37,599.00

3,977.60 3,699.20 424.80 51.40 2,859.60 11,012.60 66.40 347.80 638.80 100.00 12,165.60 265.20 2,089.40 13,842.40 (2,443.40) (67.80) 13,685.80 25,851.40

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Annexure Annexure 3: Data for finding “Role of Branding Index” for DCF Model S.No

Respondents Brand Name

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Tarun Daga Sandeep Shah Santu Chakraborty Govind Prasad Hardik Vineet Piyush Rohit Raj Uma Saurav Vinay Priyanka Ankita Gunjan Ruchika Rawat Parikshit Ghoshal Saurav Jalan Ritesh Sahill Shaha Sourabh Dhariwal Sumit Jalan Nabendu Kar Harish Yatharth Bhuwalka Pratik Gupta Sampat Bhansali Shabnam Roy Donald White Farhana Chowdhury

Brand Tracker: Stage 3

35 30 40 30 25 40 50 25 20 35 40 25 50 20 45 50 40 40 50 35 50 20 40 35 50 30 40 60 40 50

Divide 100 as a score which you would give to any of the parameters mentioned Promotional Advertisement Features Availability CRM Technology Schemes

10

10

40 25 30

5 25 15

25 20 10 10

10

10

5

10

10

10

30 20 35 30 25 50 20 35 25 10 30 20 15 25 25 40

20

35 25 20 10 25 20 10 25

10 10

20 10 10 10 25

10 20

5

20

20

25 30 30 20 50

Product and Brand Management

20 10 20 15 20 10 20

Price

Total

20

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

30 20 25 20 30 20 10 30 20 25 20 25 10 30 20 25 25 10 10 20 10 20 20 20