01 November 2009

Creating value from innovative brands

There is a very real danger that an economic ‘recovery’ based largely on cost-cutting will fool politicians, CEOs, investors and the public at large into thinking our economy is on the road to being fixed.

This is dangerous. Cost cutting is necessary to reduce bloat, but it won't create growth, jobs, or widespread prosperity. For this we need an economy fuelled by innovation: creating value from nothing, or reinventing business models that will achieve sustainable competitive advantage in competitive global markets.

Recessions accelerate Darwinian processes and the rapidity and sheer nastiness of this one has exposed how fat and inefficient many industries have become. Yet a quick bounce back to profitability by yielding the corporate scalpel may obscure a lack of long-term competitiveness and hold back investment in new ideas.

Alert executives will already have noted if their business models are flawed, although, I suspect, many more remain in denial, hoping that a bit of downsizing will solve their problems. Milking cash flows without investment in new ideas leads to brand atrophy and increases the risk of a tipping point, after which the business becomes irrelevant to its consumer base.

For innovators, the period from 2010-2012 should provide a once-in-a-generation opportunity to identify relevant new value propositions or invent new and simpler ways of doing the mundane things customers need to do. For UK plc, instead of banking on a weaker Pound to expand exports, innovation should be promoted as the best way to ensure our battered economy regains international competitiveness and attracts inward investment.

Branding innovation
Innovative ideas require funding and marketing. The brand should encapsulate the idea and articulate the offer. The value proposition should communicate why it is different and better than another, be it a financial service, software or a shampoo. Executed well, brands can become the business owner's most valuable asset.

Growing brand value is all about building and maintaining reputation, and you can achieve this by consistently delivering – better still exceeding – the brand's customer promises. Successful brands know exactly 'What they want to be famous for' and single-mindedly pursue that goal by satisfying customers time and again with consistently great experiences.

While brand reputation is difficult to build, it is really very easy to destroy, most frequently by over-promising and allowing gaps to emerge between promise and reality. In the past year we have seen brand value destruction on a titanic scale, with banks being particularly good at blowing up their good names. It will take substantial effort and investment to heal the scar tissue at RBS, Halifax, Northern Rock, Citi, let alone the ailing Irish and Icelandic banks. Some will give up the fight and decide to scupper their legacy brands and reposition under a different name.

Some of course have already bitten the bitter tasting dust with brand value vaporized: Lehman Brothers, Icesave, Bradford & Bingley, to name but three. But someone's pain is another's gain and this tumultuous time in world finance is likely to throw up many opportunities. We will see the birth of new financial brands as well as resurrected names whose reputations are unsullied by the recent past. When traditional values are required, why not dust off an old but credible bank brand, such as Williams & Glyn's?

This suggests, what we at Nucleus have long believed, that there is hidden gold in dormant but trusted brand names and trade marks, which, with a wash and brush up, can once again become relevant.

Protecting innovation
Innovation is difficult, time consuming and therefore expensive, so it's much easier and cheaper to copy someone else, which is why protecting the value – or potential value –represented in an idea, a brand or an invention, is so vital. However, during recessions, corners get cut in the management of intellectual property: advice is not sought; infringements not pursued, trade marks lapse; patent applications get aborted. All of these things compromise brand value.

Trade mark attorneys, Nucleus-ip, have noticed a clear annual trend with large client organisations limiting the number of marks they renew each year and, therefore, giving up on the rights to brands that could still be of value to their owners.

Funding innovation
Innovation, of course, requires funding and, given current circumstances, you might expect investors to be attracted to new 'challenger' or 'game changer' business models, as these are investments that could deliver alpha value in the future. In the digital age, agile new companies with good technology and the right business models, can engage customers and transform markets quickly. With cash in the bank of little appeal and equities now probably facing a long, slow recovery, there has never been a stronger case for investors to back early stage innovation.

But sadly this doesn't seem to be happening. With the venture capital industry itself in the process of restructuring, VC's don't seem to be interested in backing early stage businesses, even in hi-tech, IT and green technologies. In its October 2009 bulletin, technology corporate finance advisers Go4Venture reported "There continues to be a focus on later stage deals…Leaving early stage funds to be driven by entrepreneurs…". Sad but true. Fortunately, entrepreneurs are a determined breed and many will get on with it anyway.

But what if…

Case study – sQuid
Small value payments are still largely made in cash, with credit and debit cards dominating the payments market above £15, but unable to penetrate the small value market due to the high cost of their transactions.

During 2005, while operating Transport for London's Oystercard* website platform, Nucleus participated in the, eventually aborted, Oyster* eMoney procurement, making the final shortlist. This provided the opportunity to define a fit-for-purpose payments system that would complement next generation transit smartcards, now rolling out across the world's transport systems. With the London programme abandoned, we decided to continue to develop our concept independently.

Having defined a radical new business model and supporting technical architecture we then created a brand, 'sQuid', with a striking brand identity and distinctive proposition "now you're loaded". This was followed by a series of internet portals for customers, merchants and administrators, plus all marketing and advertising. With the help of Nucleus-ip, the distinctive brand mark, 'Q' symbol and graduated magenta backdrop were registered as trade marks in key markets.

In parallel, sQuid invested heavily in developing its next generation payment system technology, incorporating the highest levels of security and performance, to deliver mass small value payments for a fraction of the cost of existing schemes. Initially funded by Nucleus, we expanded the shareholder base to include a small number of private investors – venture capitalists proving too greedy for an early stage business.

sQuid uses a contactless pre-paid smartcard to access its internet-based network to purchase 'the little things in life' – a coffee, newspaper, a sandwich for lunch. In some UK schools, where sQuid is rapidly growing its cashless catering solution, biometrics substitute for the card, with fingerprints becoming the activation for a transaction. Uniquely sQuid has a multi-purse capability and is compatible with the new transit (ITSO) standards being introduced across the UK, which means it has the potential to become a universal payments system.

Results
sQuid launched its open payments system and local government smartcard solutions in Bolton during 2008. This was followed by Dundee, successful trials in several secondary schools and a Coffee Republic branded payment and loyalty card. During 2009 this programme has been dramatically extended in Scotland and Manchester with the first transit services now launched and schools rapidly adopting the new cashless system. Significant international opportunities in Africa, the Middle East and India are also in advanced negotiation.

sQuid has now raised further expansion capital but Nucleus retains a 50% stake, having created a valuable asset from nothing in four years.

www.squidcard.com

*Oyster is a registered trademark of Transport for London.


Peter Matthews

Nucleus Founder & CEO
November 2009

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