28 ISE Magazine | www.iise.org/ISEmagazine

The impact of

quality on brand

and reputation

Finding the right balance to sustain value

and support the company’s bottom line

By Kaiwen Cheng

June 2019 | ISE Magazine 29

Many people say manage-

ment should care more

about quality because

a lack of quality could

damage brand image and

brand reputation. The

same group of people is also likely to say

that management has not done enough

to protect the brand.

Of course, I agree 100% that we

should protect the brand image and rep-

utation, but not all actions are justiﬁable.

The No. 1 priority for management is

to sustain the business ﬁnancially. It is

the responsibility of the professionals to

provide information that can help man-

agement justify its decisions. Therefore,

this is a “two-way” street between man-

agement and professionals. It is fair to

say that management relies on the qual-

ity professionals to demonstrate the rela-

tionship between brand and quality.

People take action only where there is

justiﬁcation. I am certain most people in

business would tell you brand reputation

is critical, but having a sustainable busi-

ness is critical, too. Therefore, the bal-

ance between cost and brand is a critical

question.

Using the iPhone 4 reception issue

back in 2010, as an example, it was cer-

tainly a brand image issue when people

were upset about having reception prob-

lems with the new phones. There were

tons of complaints and sales were suffer-

ing. It takes no effort for me to argue

this was a quality issue, because it was.

Should Apple have treated this as a

product quality issue and demanded that

engineers ﬁx the phone? It seems logi-

cal. But how did CEO Steve Jobs ﬁx the

problem? He told consumers, “You are

holding the phone wrong.”

Surviving brand damage

The decision Jobs made to survive the

crisis during the 2010 launch was a bal-

ancing act between brand image and

cost. Let’s re-examine this case.

Did the brand image get damaged?

Yes.

Did the company choose to ﬁx it? No.

30 ISE Magazine | www.iise.org/ISEmagazine

The impact of quality on brand and reputation

Would the cost have been very high

if the company had chosen to ﬁx it? Yes.

Did Apple have a strong enough

brand that its customers were willing to

tolerate it? Yes.

Was the decision correct in the end?

Probably. After all, Apple went on to be-

come the company with the highest mar-

ket capital in 2018 for a short time, and

it was considered to be the most valuable

brand in 2018 (see Figure 1). My obser-

vation is that Apple paid the price on the

brand, but it still cost less than ﬁxing it.

This is a good case where even if “it is the

right thing to do” to ﬁx a quality issue, it

still may not be justiﬁable.

Samsung’s premium Note 7 smart-

phone is a different good example. Its

faulty batteries caused ﬁres when it was

introduced in 2017, a conﬁrmed quality

issue that led to the global recall and re-

release of its phones. Samsung Electron-

ics Co. said its net proﬁt fell 16.8% to

4.54 trillion Korean won ($4.0 billion)

in the third quarter of 2017. The compa-

ny’s mobile division reported its smallest

quarterly proﬁt since it launched its ﬁrst

Galaxy series phone more than six years

ago. The overall recall cost was reported

at $5.3 billion.

In this case, there was a clear cost as-

sociated with quality defect. It was too

bad the problem wasn’t identiﬁed prior

to product release. Samsung took the

right approach with the recall before

more failures occurred. I can imagine

a Samsung quality engineer saying “the

global recall may be expensive, but it

is the right thing to do to prevent the

brand damage.” Due to the potential

safety concerns, the cost of damage

would have been too high to pay, and

the brand damage would have become

uncoverable.

By looking at Samsung’s overall proﬁt

and revenue right now, it is clear Sam-

sung reduced the brand damage with

a well justiﬁed but signiﬁcant cost (see

Figure 2).

Brand value 101

The clear pattern between these exam-

ples is in the balance between the cost of

ﬁxing quality issues and potential brand

damage. Therefore, it is extremely valu-

able to develop a cost estimate of the po-

tential impact on brand value, even if it

is not precise.

But how? Start by ensuring your

organization has an understanding of

brand equity or brand valuation. ISO

10668 “Brand valuation – Require-

ments for monetary brand valuation” is

a great starting point that helps organi-

zations assess or understand their own

brand values.

A brand value can be assessed by three

different approaches: income approach,

market approach and cost approach. The

income approach primarily focuses on

assessment through evaluation of the

brand impact on sales, acquisition or

pricing that is reﬂected in cash ﬂow. For

example, a premium brand such as Gu-

cci or Mercedes-Benz (see Figure 3) has

greater freedom in its pricing strategy to

FIGURE 1

Apple’s core success

The increasing brand value of Apple for a decade prior to 2018.

FIGURE 2

Samsung’s steady tune

The brand value of Samsung has risen slowly since 2009.

June 2019 | ISE Magazine 31

set higher prices. Such an advantage di-

rectly beneﬁts a company’s income level.

In other words, for two companies with

the same level of operating efﬁciency,

the premium brand would have a higher

proﬁt margin.

The market approach compares

similar brands. Think housing market,

where your sales price is close to com-

parable houses sold in your neighbor-

hood. Therefore, businesses can use

deals among similar brands to establish

their own brand valuations. The cost

approach measures the value of a brand

based on the cost invested in building

the brand, its replacement cost or its re-

production cost.

In the Samsung Note 7 example, the

recall cost was reported as $5.3 billion.

Considering that the recall avoided po-

tential lawsuits resulting from human

and property damage, it prevented fur-

ther deterioration of its $59 billion brand

value. This cost estimate can be used as

the basis to conﬁrm the brand valuation.

There are a lot of ﬁnancial details in-

volved in properly deﬁning a company’s

brand equity, but for most, the focus

would just be on the concept of brand

valuation itself. If you plan to make a

point by using the brand image or brand

reputation as a justiﬁcation for anything,

it would be a good idea to understand

how your investments or projects can

add value to the brand.

Leadership and brand image

Brand valuation studies have clearly

conﬁrmed that a brand is an intangible

asset. Then why doesn’t management

always take action to prevent damage to

its brand or reputation? The most logical

explanation is that it can’t justify the cost

of action to prevent damage.

Here is a made-up example based on

my experiences. Let’s suppose Company

X is a supplier for a simple sheet metal

bracket. The risk of the application of

this bracket is low, and the worst-case

failure would result in customer dissat-

isfaction but will never hurt anyone. In

this example, the quality engineer iden-

tiﬁed that the newly produced brackets

had discoloration with slight dimension-

al defects. The appearance was poor, but

the bracket would assemble and function

without issue. Should leadership allow

them to inquire with their customer

about accepting these products?

There are at least two scenarios that

would lead to different approaches. Sce-

nario one: Company X understands it

is chosen based on price and this cus-

tomer is not one of Company X’s core

customers. In this case, the brand won’t

have an impact on its future business be-

cause the decision was based on price.

Company X has a good chance to be

replaced by another low-cost supplier,

especially since there is low or no liabil-

ity for product failure. I am sure there

are many managers who would take the

chance and ask their customer to accept

subpar products.

Scenario two: Company X wants to

have a long-term relationship and grow

with this customer. It wants to be con-

sidered as the vendor for future business

with more complex parts and bigger

margins. In this case, the brand would

have an impact on future income. It

is important to build the image of the

company to be one that won’t ship sub-

par products to their customers. In this

situation, leadership is likely to take ac-

tion and ﬁx the problem to maintain the

brand image.

I use these scenarios to contrast deci-

sions. Taking action to protect the brand

is not only based on internal factors.

A company’s brand can be inﬂuenced

by many external factors as well as the

strategic direction deﬁned by the senior

leadership. To avoid frustration on why

leadership “is not doing the right thing,”

you must understand the underlying

FIGURE 3

Pricey ride choices

Mercedes-Benz’s status as a premium brand gives it more ﬂexibility in pricing strategy

than its competitors.

32 ISE Magazine | www.iise.org/ISEmagazine

The impact of quality on brand and reputation

drivers that inﬂuence the decision, espe-

cially when you have a desire to change

the course of action.

Action plan to build brand

Let’s say you are a leader in your orga-

nization who wants to promote a qual-

ity culture to improve the brand. What

would you do? Below are few actions

that can increase your chance of success.

1. Identify if quality is a key element of

the brand.

2. Establish the multiplier for business

beneﬁt estimation.

3. Utilize the multiplier to justify proj-

ects for improvement.

Identify if quality is a key ele-

ment of the brand. Quality is a mea-

sure of how closely our products and

services meet customers’ expectations.

Based on this deﬁnition, I believe ev-

eryone would say quality is for sure an

element of the brand. The reality is that

this is not universally true. If you realize

your company doesn’t believe quality

should be a key element of the brand,

but you believe it should be, then my

only conclusion is you probably are in

the wrong company.

Establish the multiplier for busi-

ness beneﬁt estimation. Using a

multiplier for project justiﬁcation or

prioritization is more practical because

brand value is complicated to capture. A

multiplier is used against the tangible di-

rect beneﬁts from each project or invest-

ment. Such beneﬁts might include scrap

reduction, cycle reduction or inventory

reduction. The overall estimate beneﬁt

would be calculated based on the tan-

gible beneﬁt times the multiplier.

The logic behind this approach is each

employee can be directed to perform

value-added, routine or nonvalue-added

tasks. By investing in quality improve-

ment, we can refocus resources on tasks

that would add value for the company or

brand. There were academic studies stat-

ing the overall business beneﬁts of qual-

ity projects could be six times as high as

the tangible beneﬁts.

There is no practical

reason to lock in an ex-

act number for the mul-

tiplier. In general, most

managers expect their

employees to generate

beneﬁts equaling one to

four times their salaries.

This is an easy concept

for management.

In my own case, we

presented the idea to

senior leadership. Their

answer was they believed

six times would be a rare

case, but four times is

acceptable. Since then,

four to six times has

been used as the mul-

tiplier to performance

sensitive analysis on po-

tential return on proj-

ects, which has acceler-

ated the project approval

process signiﬁcantly.

Utilize the multi-

plier to justify proj-

ects for improve-

ment. After completion

of step 2, this becomes

very straightforward.

Again, you would want

to have a range of multipliers that is ac-

ceptable in your organization. The se-

lection of multiplier(s) within the range

would depend on the projected potential

and the conﬁdence. Therefore, once tan-

gible beneﬁts have been identiﬁed, we

apply the multiplier(s) to deﬁne actual

beneﬁts to justify projects. Keep in mind

there is no substitution for having data

and concise communication to support

a justiﬁcation.

In summary, professionals can be

more effective by understanding the fac-

tors of management decisions, especially

for quality professionals. The seemingly

right thing to do, such as protecting the

brand, may not bring tangible beneﬁts

for business. The logic of brand evalua-

tion provides a tangible measurement as

a ﬁnancial benchmark.

Such an approach would allow proj-

ects with intangible beneﬁts, including

quality or brand image, to be compared

side by side with tangible projects. Since

management’s No. 1 priority is to ensure

ﬁnancial sustainability for the business,

this approach provides a transparent and

objective cost-beneﬁt analysis without

ambiguous arguments. 

Kaiwen Cheng is owner of KC Business

Consulting LLC in Denver, North Caroli-

na. He has a master’s degree in industrial and

systems engineering from University of Mis-

souri–Columbia. Cheng has over 20 years

of experience with Fortune 500 companies.

He is a certiﬁed Six Sigma black belt and an

IISE member.

Top-rated brands for 2019

Here are the top 25-ranked brands in Brandirectory’s

Global 500 2019 at https://brandirectory.com:

1. Amazon, United States, $187,905 million

2. Apple, United States, $153,634 million

3. Google, United States, $142,755 million

4. Microsoft, United States, $119,595 million

5. Samsung, South Korea, $91,282 million

6. AT&T, United States, $87,005 million

7. Facebook, United States, $83,202 million

8. ICBC, China, $79,823 million

9. Verizon, United States, $71,154 million

10. China Construction Bank, China, $69,742 million

11. Walmart, United States, $67,867 million

12. Huawei, China, $62,278 million

13. Mercedes, Germany, $60,355 million

14. Ping An, China, $57,626 million

15. China Mobile, China, $55,670 million

16. Agricultural Bank Of China, China, $55,040 million

17. Toyota, Japan, $52,291 million

18. State Grid, China, $51,292 million

19. Bank of China, China, $50,990 million

20. WeChat, China, $50,707 million

21. Tencent (QQ), China, $49,701 million

22. Home Depot, United States, $47,056 million

23. Taobao, China, $46,628 million

24. T (Deutsche Telekom), Germany, $46,259 million

25. Walt Disney, United States, $45,750 million