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Valuing Corporate Image

Some folks conclude from disparaging remarks I've made about poorly done advertising and PR efforts (see pages [Ref] and [Ref]) that I don't believe in spending money to build corporate image. Not at all; I believe corporate image is ultimately a reflection of the behaviour of an enterprise over time, and can benefit from a well-executed communications campaign. One often hears arguments against general corporate identity programs which claim, “It's only wasting money to stroke the CEO's ego” or “Unlike product promotions, you can't quantify the value received.” In the midst of a debate about how much time and money Autodesk should spend to position itself as a broadly-based software company as opposed to “the AutoCAD company,” I tried to provide a metric for the value of corporate image.

Valuing Corporate Image

by John Walker — May 13, 1991

A cynic is a man who knows the price of everything, and the value of nothing.

— Oscar Wilde

Several people have discussed ways by which Autodesk might raise its profile and alluded to the cost of advertising directed at overall perception of the company's standing in the industry. Well, it's easy to be cynical about something called “corporate image,” especially when you look at how much money is wasted with no perceptible benefit in pursuit of that elusive goal. But one thing that's nice about business, especially if you're a numbers freak, is that it's often possible to calculate not just the cost, but the value of a company's image in the minds of investors and, presumably, the larger market for its products, old and new.

Suppose somebody suggests allocating some money towards reorienting our marketing communications efforts more around the company than towards promoting individual projects. What's involved would be, I suspect, more a change in focus than a major new initiative—much like the way Microsoft always refer to their products as “Microsoft Excel” and “Microsoft PowerPoint,” never just the product name alone (even though that's what the rest of the world calls them). Like Microsoft's recent “you have an assignment” campaign, we would focus on solutions embodying several of our products, not just a single program (and as one who's spent much of the last 4 years building links between our products and prototyping multi-product solutions, I can assure you there are plenty of such stories to tell, both internally generated and crafted by customers).

We can see what it will cost, but what's the value? It's easy to take pot-shots at such a campaign by saying, “with such a limited promotion budget, we have to spend every cent on rifle-shot targeted product promotions, not a broader message.” But resources are always limited, and still one must choose the wisest course.

As I discussed briefly in Information Letter 14 (see page [Ref]), the price/earnings ratio of a company's stock is a direct measure of the market's perception of a company's strength or weakness.[Footnote] Instead of an amorphous measure of sentiment, it's based on cold hard cash; it tells how many dollars investors are willing to fork over to buy a dollar's worth of the current earnings of a company. If they pay more, it's because they believe that the company is in a strong position to continue to grow in the future, thus rewarding investors with increased earnings and consequently a higher share price.

When two companies in the same business, with identical margins, bear substantially different price/earnings ratios, those numbers are the market's verdict on the strength of those companies. By promoting the company and changing its perception, one is rewarded if successful with a rising P/E. What can this mean?

Let's take two software companies with identical margins, Autodesk and Microsoft. One is perceived as a one-product applications company in a specialised industry (notwithstanding being number 4 in the PC software business overall), while the other is seen as a broadly-based vendor with fingers in system software and many applications, diversified across different platforms. As of the market close last Thursday, Autodesk was trading at a P/E of 25, while Microsoft commanded a P/E of 33 (these have tightened up since I wrote IL14; at that time the numbers were 22 and 34).

Assume for a moment that half this P/E gap is genuine, reflecting Microsoft's larger size, broader product base, and demonstrated success in opening new markets, and the other half stems from Autodesk's low profile as a software company in the general market. If, by increasing Autodesk's visibility, we were able to close half the gap, Autodesk's P/E would then rise to 29 from its current 25.

The P/E is, of course, computed directly from the share price, so that rise would imply a rise in the stock. How much? Why,

58.5 × 29/25 = 67.86

So, the value of increasing Autodesk's “corporate image” to this extent would be a substantial rise in the share price. But share price doesn't give the true value either. To get that, we need to multiply by the number of shares outstanding, about 24,330,000, to get the actual increase in the value of the company. That gives us:

(67.86 − 58.5) × 24,330,000 = 227,730,000

or, in other words, a tad less than a quarter of a billion dollars; a number comparable to a year's gross sales receipts from AutoCAD.

Kind of puts “image” in a different light, doesn't it?

The essential part of the story that we're not communicating is that Autodesk's new product initiatives: multimedia, Xanadu, molecular modeling, the science series, and others coming down the road, are not only connected in an applications sense with AutoCAD, AutoShade/RenderMan, Generic CADD, AutoSketch, and other existing Autodesk products, but are consistent in a strategic sense as well. Every one of our current products was, at the time we launched it, on the very ragged edge of what could be done on the hardware of the time and was considered a marginal application, far from the mainstream of the PC industry. Those that have succeeded have expanded the envelope of the applicability of the desktop computer and have created new markets which, having opened, we now dominate. This is why Autodesk products rarely get off to a quick start; they have to co-evolve with the hardware and build the applications market which they will eventually be considered synonymous with. This process can be slow and frustrating but, as AutoCAD has demonstrated, it can be very rewarding.

Were that story fully appreciated by the market and embodied in Autodesk's P/E, the value would be very great indeed.

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