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The Analysis of Challenges and Opportunities in Brand Extension Halmstad University School of Business and Engineering Master Dissertation in International Marketing Master Dissertation in Strategic Management and Leadership The Analysis of Challenges and Opportunities in Brand Extension Authors: Chen Si Jia 891028-4986 Gu Jing 880711-T284 Supervisor: Gabriel Awuah Date of Submission: 31 May, 2012 Acknowledgements We would like to firstly thank our supervisor, Professor Gabriel Awuah, for his constant support and inspiring advices during the whole process of this dissertation. We would like to give our thanks to our opponent group members: Mazhyrina Yuliya and Negru Adela, for their careful corrections and suggestions. We would also like to thank other group members during each seminar. We would like to warmly thank our beloved parents for their unconditional love and solid support and care. We would like to thank our domestic friends as well as overseas ones, for their understanding and kindly support in spite of time and space. Finally, we are very grateful for having the opportunity to work on this thesis at Halmstad University. Chen Si Jia and Gu Jing Halmstad University May 21, 2012 I Abstract Over the decades, brand extension has been a core marketing strategy for a great number of companies. Brand extension enjoys a good reputation for bringing practical advantages to companies whilst it faces disputation at the same time because of a relatively high percentage of failures. Using modified Aaker’s brand equity model as the theoretical framework, the authors undertake a comparative case study to analyze the opportunities and challenges a company might face while using brand extension strategy, particularly in category brand extension: Yamaha Corporation as a successful example, and Virgin Group as a failure one. The analysis mainly focuses on the four elements in the modified Aaker’s brand equity model: brand awareness, brand loyalty, brand associations and perceived quality. The findings show that a company faces challenges when consumers have a more solid loyalty towards the competitor’s brand and when consumers are confused about brand associations. On the contrary, a company acquires opportunities in brand extension as long as a strong brand loyalty and a related connection between the parent brand and the extended brand exist. Keywords: brand equity, brand extension, category brand extension II Index 1 Introduction ................................................................................................................. 1 1.1 Background ....................................................................................................... 1 1.2 Problem discussion ........................................................................................... 2 1.3 Research purpose .............................................................................................. 3 1.4 Research question ............................................................................................. 3 1.5 Delimitations ..................................................................................................... 3 2 Literature review ......................................................................................................... 4 2.1 Brand extension ................................................................................................ 4 2.1.1 Types of brand extension ........................................................................ 4 2.1.2 Benefits for brand extension ................................................................... 5 2.1.3 Risks of brand extension ......................................................................... 6 2.2 Brand equity ...................................................................................................... 7 2.3 Modified Aaker’s brand equity model .............................................................. 8 2.3.1 Brand awareness ................................................................................... 10 2.3.2 Brand loyalty ......................................................................................... 11 2.3.3 Brand associations ................................................................................ 11 2.3.4 Perceived quality ................................................................................... 12 3 Methodology ............................................................................................................. 13 3.1 Research method ............................................................................................. 13 3.2 Research approach .......................................................................................... 13 3.3 Data collection ................................................................................................ 13 3.4 Reliability and Validity ................................................................................... 14 4 Empirical Data .......................................................................................................... 16 4.1 CaseⅠ: Yamaha Corporation.......................................................................... 16 4.1.1 Introduction: .......................................................................................... 16 4.1.2 The Parent Brand: Yamaha Musical Instrument ................................... 17 4.1.3 The Extended Brand: Yamaha Motorbikes ........................................... 18 4.2 CaseⅡ: Virgin Group ..................................................................................... 19 4.2.1 Introduction ........................................................................................... 19 4.2.2 The Parent Brand: Virgin Atlantic Airways Company .......................... 21 4.2.3 The Extended Brand: Virgin Cola ......................................................... 22 5 Analysis ..................................................................................................................... 24 5.1 Brand Awareness ...................................................................................... 24 5.2 Brand Loyalty .......................................................................................... 25 5.3 Brand Association .................................................................................... 26 1 5.4 Perceived Quality ..................................................................................... 27 6 Conclusions ............................................................................................................... 28 6.1 Conclusion ............................................................................................... 28 6.2 Implication ............................................................................................... 29 6.3 Limitation ................................................................................................. 30 Reference ..................................................................................................................... 31 2 1 Introduction 1.1 Background Brand extension as a growth strategy has been employed in many companies and has increased its popularity in the recent decades. It also has gained a lot of attention from academic field. The use of established brand names to enter new product categories or classes is defined as brand extension (Keller and Aaker, 1992). Brands are important and are becoming more crucial for a company to survival in today’s fierce competitive business world. Brand names are among a company’s most valuable assets (Klink and Smith, 2001). A brand name defines a unique quality, function, characteristic, promises, and trust which make it distinguishable from other products. Brand can be produced, just like any product, by the company (Karin, 2010). Obviously, using an existing brand name can substantially reduce the risk of introducing new product and thus enhance the opportunity of fast profit growing. According to Byron (1993), the reason why brand extension is so popular is because it can create growth in the cost leading competition, redefine a new direction of a business or firm, gain economic scale in advertising, introduce new products without advertising and achieve new products’ success through endowing it with the goodwill but gain trial and distribution in an easier way. Brand extension has been discussed by lots of researchers (Aaker, 1991; Keller, 1993; Peter, 1989), some of them hold the opinion that brand extension can be broadly classified into two general categories: vertical extension and horizontal extension. Horizontal extension includes line extension and category extension (Peter, 1989). Having studied 276 brand extensions cases, Tauber (1990) uses 7 types of categories to understand different ways of brand extension, trying to show the numbers of possibilities in brand extension depending on company’s products and customer franchise. Other researchers classify brand extensions into 3 types: range extension, line extension and brand extension (Hamish and Peter, 2008). Well-implemented extensions can offer a number of advantages to companies: reduce the cost of developing a new brand, increase efficiency of promotional expenditures, allow for packaging and labeling efficiencies and so on (Kevin 2003). The successful sectors in brand extensions have been widely discussed by many scholars. Successful brand extension depends on many considerations, including the appropriateness of a company’s corporate structure, ability of personnel in the new market, and also
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