Vigilance Necessary to Prevent ‘Brand Pirating’

Stanley G. Hart
09/18/2006

by Stanley G. Hart

What makes up the value of a company? People, free cash flow and physical assets are all factors. However, what truly builds long-term shareholder value is the consistent capability to offer and execute a better product or service, which continually reinforces a perceived value to the customer. To maintain product or service leadership in the marketplace, companies spend a tremendous amount of money reinforcing the perceived value of each brand to targeted markets. However, with great success comes an equal amount of risk. The more popular and international the brand, the greater risk the brand owner faces. Yet the level of oversight and diligence that is required to protect the brand and the associated intellectual property (IP) is, in most cases, insufficient— and “brand pirates” have successfully exploited this to their advantage.

Good corporate governance requires protecting assets against all forms of risk, including counterfeiting and diversion. To do so, management must identify all risks and ensure that policy, procedures and a plan of action are in place to confront such risks. The Sarbanes- Oxley Act of 2002 (SOX) mandates these actions and requires management to act as enablers to protect value. Moreover, SOX requires companies and their boards to attest each year to the effectiveness of internal controls explicitly related to the prevention, identification, and detection of misconduct and fraud in all its forms. Internal controls that assess the risk of counterfeiting or product diversion fall within this interpretation.

As stewards of building and protecting shareholder value, management needs to realize the impact counterfeiting and product diversion can have on shareholder value. By doing so, management can ensure that policy, procedures and a plan of action are in place and thus fulfill their fiduciary responsibilities to shareholders.

Understanding the Threat

The World Customs Organization estimates global losses due to counterfeiting are $450 billion annually. This number has been growing at 10 to 15 percent per year due to economic globalization, overseas production, outsourcing, high financial incentives for counterfeiters and the active participation by organized crime and terrorist organizations in world commerce. Given these statistics, are any products or services immune? The answer is most definitely no.

According to the International Chamber of Commerce (ICC), “counterfeiters will target any product where a profit can be made, irrespective of the potential for harm.” However, the sophisticated industrial counterfeiter knows that while huge sums of illicit profit are made from knock-off pharmaceuticals, tobacco or even distilled spirits, the risk of prosecution is far greater given the level of regulatory attention these products currently receive. Consequently, producing and selling knock-off handbags, salon products, software, personal care products or watches offers the counterfeiter a similar profit margin but with far fewer risks. Currently, 10 percent of all cosmetics and toiletries sold worldwide are counterfeit; consumer electronics counterfeits are estimated at 15 percent of trade; and the global counterfeiting of IT and software products is estimated at 40 percent, and totaling almost $12 billion per year in lost sales.

The potential damages companies face when their IP, trademarks and/or copyrights are counterfeited or misused include:

Loss of revenue, profit and increased service cost.
The loss of revenue is the most obvious and direct consequence of counterfeiting. Yet the financial impact of warranty payouts, returns and other service costs can also be substantial.
Damage to brand equity.
By far this area carries the greatest potential damage to shareholder value—the utility and perception of the brand in the eyes of the consumer. This is especially true when trying to establish new brands or entering new geographic markets.
Product liability.
When a product is brought to market, the brand owner is held liable for the performance of that product. Even in the case of tampering and counterfeiting, when the brand owner has little or no control of a product failure or harm, liability (especially in the consumer’s eye) is still attached to the brand owner unless evidence can be presented to the contrary.
Bad publicity.
This can come in many forms and has an immediate impact on shareholder value as the market reacts to the publicity and tries to gauge the impact on the company. The impact of bad publicity can be mitigated or even be of value if the company is able to demonstrate a proactive program designed to eliminate or at least stem the problem.
Product recall.
People often think of product recalls as quality problems. However, if a manufactured product is a component or a product uses sourced components, the brand owner may still be subjected to a product recall due to component counterfeiting. Such is the case with Kyocera cell phone batteries, wherein a supplier introduced counterfeit components into the product. This led to safety problems for Kyocera and a total recall of all batteries associated with the particular supplier.
Dealing with the Problem

Companies and management need to take a proactive approach to dealing with the issue of IP protection. There are several key steps in establishing an effective program:

Assign senior management responsibility.
The first step is for the chief executive officer (CEO) to assign responsibility to a senior officer. This assignment varies from company to company due to organizational structure and the skills of each individual member.
Hire a qualified independent consultant.
Protecting IP is a very complex endeavor that requires a review of company policies, strategies and markets. Having a firm with experience in protecting IP working with the board and management will speed the process and assure that best practices are employed in the development of your overall strategy.
Establish senior management ownership across the board.
The senior management team must take ownership of the program right from the start so that strategic objectives can be set, directions can be given, and policies can be standardized across all brands and operations.
Create a preliminary team.
Assemble a cross-functional team of executives. This team should be empowered to make decisions, gather information, execute policies and create a system for controlling the flow of information, both within and outside the organization. An initial budget should be assigned for this group to accomplish the preliminary steps. The organizational requirements and structure will change as the establishment of a program evolves, so there is no need for permanent positions at this stage of development. However, this will be important once the organization formalizes its brand-equity protection program.
Develop an initial assessment.
In the initial assessment stage, it is essential to assemble the necessary information to understand potential problems. This would include supply-chain mapping, analyzing policy, distribution contracts, procedures, communication protocols and the role of suppliers to measure the impact they may have on the problem.
Create a brand-equity protection plan.
The development of a brandequity protection plan should have the same basic components as a business plan or marketing plan. Outline the roles and necessary changes needed from marketing, public relations, finance, brand management, sales, research and development (R&D), manufacturing, packaging, legal, purchasing and supply-chain management. There is no silver bullet to put an end to counterfeiting. What is needed is ongoing and collaborative diligence from all quarters of the organization to protect the value of the brand as part of an overall corporate strategy.
Establish a formal organizational structure and budget.
With a brand-equity protection plan in place, the next step is to examine the company’s hierarchy and structure to see how best to support your brand-equity protection initiative. There will be a great deal of work, coordination and communication going forward, including the ongoing need to stay current on the various international enforcement regulations. Companies must commit to defending the brand and creating the necessary resources to defend on a full-time basis. Realize that the structure you employ must effectively work with all the operations identified in your plan, in addition to external resources such as investigators, customs, police, industry associations and authentication suppliers.

Once the decision for an organizational structure is made, it is time to set the appropriate budget needed to meet the specific objectives outlined by the executive team. With clear objectives and an unambiguous budget, it is possible to assign accountability and track the return on investment gained by the brand-equity protection program.

Set up communications protocols.
With the main components of a program in place, the company needs a communication strategy. How will the company communicate with its employees, shareholders, distributors, suppliers, associations, customers and the media? The level of communication will depend upon the severity of the problem and the design of the program. The company that takes a proactive approach sends a clear message that they are serious about protecting their IP and are serious about taking steps to thwart the issue head on.
Conduct an annual review.
As is the case with financial audits, the board and management should request an annual review of the program by an outside firm with extensive experience. This will serve to make sure policies and procedures are followed, assess the effectiveness of the program, make recommendations on modification of the program to stay current on best practices, and assign an overall return of investment.

Protecting the brand is not just another “cost of doing business.” Protecting brands, IP, trademarks and copyrights is smart business that can enhance or recapture top-line revenue. Understanding the threat of counterfeiting and framing this threat the same way one might frame any other competitive situation is a strategic exercise worthy of all management. Once completed, there are methods available to help mitigate future risk, as well as reap rewards. Indeed, the average return for companies that institute a formal brand-protection program is $10 to $50 for every dollar spent protecting the firm’s most valuable assets. In the end, brands are the lifeblood of the organization, which is made possible by shareholders and stakeholders alike. It is the responsibility of management to do their utmost to protect that investment.

Stanley Hart is president and CEO of S.G. Hart & Associates LLC (www.sghartassociates.com) in Ridgefield, Conn. He has extensive experience in the design of brand protection programs, has been featured within numerous publications and has been a keynote speaker on the subject. S.G. Hart & Associates, The Brand Equity Protection Company™, is a global brand protection consulting company helping clients develop and implement strategies that protect supply chains from the disruptions caused by counterfeiting, product diversion, tampering and theft.

Share this article: Email, Slashdot, Digg, Del.icio.us, Yahoo!MyWeb, Windows Live Favorites, Furl
Add this article feed to: RSS, My Yahoo, Newsgator, Bloglines

Sponsored Links	Natural Products INSIDER Announcements