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Brand imitation and its effects on innovation, competition, and brand equity
on Innovaion, Competition, and Brand Equity Ricky Wilke and Judith Lynne Zaichkowsky
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lthough the practice of intentionally integrating the name, shape, symbol, color, or “look and feel” of a leading brand to a new brand has been common and well-documented since the mid-1800s its perceived legality and acceptability are elusive. One reason may be that imitating is different from obvious forms of trademark infringement, such as counterfeiting and piracy, which are easy to define and identify. Brand imitation-r “passing off,” in legal language-is based on similarities, and what is perceived to be similar to one party may not be perceived as such by others. Brand leaders, who have to deal with imitators, find it a very expensive, exhaustive, and ongoing process. Lego@, the Danish toy company, has a team of 14 lawyers who handle 30 to 40 cases of brand imitation in 10 to 15 countries at any one time. Because brand imitation is a legal issue involving passing off or “brand confusion,” trademark laws govern it. The problem with laws, however, is that (1) they can change over time, (2) they vary from country to country, (3) they can vary within a country, such as the United States, (4) each case is dealt with separately, and (5) the interpretation of the laws as they apply to each case is made by different people with different experiences, beliefs, and values. International brands like McDonald’s, Lego@, or Disney would prefer to see very restrictive laws against imitation, They view imitators as parasites that suck healthy companies dry. Other firms make their living by imitating-Cott, the soft drink maker, is one-and hence claim that restrictive laws are not good for the marketplace. Private store labels argue that the look of the package defines the product category and not the brand itself. They want the laws to be broadly Brand Imitation
and Its Effects on Innovation,
Competition,
to be discussed in addressing this question: ?? Joseph Schumpeter (1950) wrote that innovation is necessary for societal welfare. Imitation may inhibit innovation so that consumers are worse off. ?? Competition is the heart of a healthy marketplace, says Steven Schnaars (1994). When imitation is a form of competition, then the market may become more efficient. ?? When imitation misguides, misleads, or confuses consumers, there is deception in the marketplace that can destroy the language of brands and devalue whole product categories. These arguments will be reviewed here, using the framework depicted in Figure 1, to assess when imitation benefits society and at what costs. The issue goes far beyond protecting brand names, trademarks, or trade dress; imitation may affect consumers’ very faith in the marketplace. IMITATION VERSUS COUNTERFEITING
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ounterfeiting refers to a “direct” copy. But imitators need not copy directly; they need only borrow or copy some aspects or attributes of the original. Manufacturers tend
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consumers that the good is counterfeit. Such a case is usually referred to as piracy, since the manufacturer’s intention is not to deceive the consumer on QUALITY OF IMITATOR COMPARED TO ORIGINAL. the true origin of the good. The consumer may consciously seek Better Equal Worse out and purchase these fake products through purchase location, low pricing, obvious differDepends on price Has potential to Society ences in design details, quality, destroy equity ratio: better value, better off of original brand society better off or other observable features. Examples are pirated CDs, video games, and computer software sold at low prices, often with inferior packaging. Destroys the language LJtXr”p Destroys Usually the courts side with of brands and can the language th e language the manufacturer and see no destroy the whole of brands of brands product category difference between pirated goods and counterfeit goods. They do not take into account the many eager and satisfied consumers of “fake” CDs, software, or luxury goods. Some counterfeiters, renot to differentiate between imitators and counports Stipp (1996), use this argument to justify terfeiters. Both can create similar problems for their actions: original brands because both infringe on the original’s image and profits. Losses in sales due I tell my customers it’s a copy.. . .People to counterfeiting are estimated at $200 billion can’t afford the real stuff. Take Chanel. annually in the United States alone. Sales losses Their quality is great, but the bags aren’t due to imitators easily surpass this, because there worth the price people pay. They have are many more imitators or look-alikes than di$2,800 bags I’ll sell you for $150.. .We’re rect copies. While courts may fail to recognize doing a service by allowing people to imitators as illegal competitors, original brands have a dream. may think of them as unfair competitors.
Figure 1 Assessing the Benefits and Costs of Imitation Brands
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n__*.._.
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Counterfeit Copies The law takes the position that counterfeiting may harm society at large, especially when the counterfeit is not a direct copy in quality, only packaged or manufactured to look like the original. When the counterfeit is sold at near the price of the original and consumers cannot judge the quality (as in credence goods) and are misled by the brand name, trademark, or trade dress, then they may think the counterfeit good is the original. If the quality of the ingredients or manufacturing process is inferior, individual consumers or even whole nations may be harmed. Kenya is reported to have lost a substantial portion of its coffee crop after farmers unknowingly used ineffective counterfeit fertilizers. Counterfeit drugs, including birth control, are sold to developing countries, resulting in ineffective treatments. Some airplane crashes are attributed to counterfeit parts, which rarely meet federal safety standards. Counterfeit auto parts are said to last only 5 to 25 percent as long as genuine parts. When a counterfeit is sold at a fraction of the usual selling price, this is said to be a signal to 10
However, it may be arrogant to assume that customers know a good is counterfeited based on its low price. They may assume it is stolen merchandise. Or they may think the seller has obtained the goods through parallel import arrangements, because it is not unusual for goods to sell at a lower price in a foreign country than they do in a domestic market.* Consumers also may not know what a reasonable selling price might be for the good. So although the original manufacturer and some consumers know that the good is pirated, this may not be enough evidence to show that the majority of the consumers know it is a “counterfeit.” Counterfeit luxury goods, such as those of Cartier, Chanel, and so on, provide an elevated feeling to consumers who cannot or will not pay for the original. They allow lower-income people to have a little brush with prestige, appear more affluent from a distance, and perhaps feel better about themselves. However, they may also damage the image and equity of the original brand. *Ed. note: See M. Myers and D. Griffith, ‘Strategiesfor Combating Gray Market Activity, ” in this issue. Business Horizons / November-December
1999
Very little public money is spent investigating luxury counterfeits; the fight is left to private detectives hired by companies and trade groups. Once the case is before the courts, however, there is pressure to treat pirated goods and counterfeit goods equally under the law. Imitation Copies Imitators are far more difficult to deal with because the goods are not identical to an acknowledged and widely known product or service in the marketplace, only similar in substance, name, shape, and color. The problem is that to say two things are similar in having a specified property in common is nothing more than saying they hav-e that property in common. Comparative judgments of similarity often require weighting the relative importance of the product attributes. The variation in perceived relevance and importance of the product attributes can be rapid and enormous. What makes two attributes alike depends not only on what properties they share, but who makes that comparison and when. To compensate for the difficulties in articulating similarities, most comparisons focus on the differences. So the opinions on the acceptance of imitations are much wider than for pirated goods. From a social welfare perspective, the difference between counterfeiting and imitation may be moot. Consumers may suffer the same consequences from buying imitations as from buying counterfeits. This is because sometimes consumers are not aware of the original manufacturer and sometimes they are, just as with counterfeit goods. The original manufacturer believes imitation always harms the broader social welfare of the marketplace by inhibiting the introduction of innovative new brands, competing unfairly, and destroying brand language. DOES IMITATION INHIBIT INNOVATION? conomists such as Schumpeter and Galbraith have argued in favor of monopolies and big companies, respectively, as being the locomotives of innovation. Big companies often have the capacity to maintain specialized R&D departments. They have routines regarding innovative structures and competencies, which is by definition a catalyst of innovation. Even when a lot of innovative ideas are generated in small firms, the firms often lack the resources to support such marketing activities as distribution and branding. This is why a company like Microsoft finds success in buying small firms with innovative products and bundling those products with its existing ones (and existing channels). It is very important to make the distinction between innovation as a strategically planned
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Brand
Imitation
and Its Effects
on Innovation,
Competition,
process and innovation as an outcome or product. When imitation supports small companies eager to attain capital by imitating the innovation, and they consequently discover something new and make improvements in the innovation, then imitation is good for society. Therefore, imitation is good if learning results or if it is serendipitous in nature. It is also important to note that the issue is larger than information protected by patents and copyrights. The trademarks associated with patents and copyrights affix good will. Trademarks communicate to consumers verifiable features for distinguishing different products, whereas patents and copyrights only protect unique characteristics. Consumers do not rely on patents to communicate quality; trademarks do that. Innovation Is an Investment Cost If innovators could not at least recover the cost of product development, then there would be no incentive to invest in innovations. While the patent system creates a temporary monopoly in order to provide a sufficient payback on investments to motivate future inventors, it also functions as a diffusion mechanism by documenting and making public the content of the innovations. This knowledge can then be used by other inventors in their inventive activities. Allowing more people to exploit the same knowledge instead of just the monopoly firm creates an advantage for society. When firms gain protection under the Trademark Act, they can recover their sunk costs. So they are able and willing to invest in all the expenses associated with innovative behavior, improving the product linked with the brand name and creating new products to add to their brand repertoire. Even everyday language benefits from innovations by creating new words that help articulate communication in society. The most recent example is Viagra, the brand name of the impotence pill by Pfizer. This word is now used as a noun (impotence pill), a verb (to revive), and an adjective (lusty, tireless). According to Prager (19981, journalists from Barvon $ Time, and many daily newspapers have integrated the brand name in their writings to connote resurrection, jump-starts, vim, and value. Most important, brands reduce search costs and risks for consumers in the buying process. New brands give consumers more choices with different attributes to pick from, which may be in the consumers’ interests. Take Gillette, for example. Its goal is that 40 percent of its sales every five years must come from entirely new products, not just line extensions. The Sensor razor that is said to have taken 10 years to perfect exemplifies the time, money, and effort spent on innovation.
and Brand
Equity
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It is doubtful that Gillette would be so committed to this strategy if it felt its efforts would not be protected under its world-famous brand name. Therefore, protection from imitation actually may provide more products from which the consumer can choose. An older and perhaps more established company is Procter & Gamble. It deals regularly with imitation of a large number of brands, especially such historic ones as Tide laundry detergent and Head & Shoulders shampoo. P&G has made 70 ments to Tide sinc:e the brand’s launch in 1956,with the core promise that it will get clothes cleaner than any other laundry detergent on the market. The firm’s consistent investment in product improvements enhances Tide’s perceived superiority and provides the basis for information to differentiate brands. P&G devotes $1.2 billion annually to research and development, holding more than 2,500 active patents and employing 1,250 Ph.D. scientists. The company is clearly committed to innovation through research. Because of this commitment to introducing new products, it is in the interest of consumers and society that firms cannot easily imitate each other. So a restrictive trademark law can be seen as being in consumers’ interest because the development of new brands gives them the possibility to choose among brands with different attributes, to have a broad category of brands at their disposal, and to live in a society that values new process technologies. Imitation
Is a Legal Cost
The public announcement inherent in innovation in a certain field will spread the news and the novelty to other parts of the corporate sector. However, it may also have a negative effect in that it provides specific information to the real imitators, who make an “almost” direct copy of the innovation. The incentive on the part of the imitators to infringe on or test a monopoly depends on the risk and inherent consequences of a lawsuit. In the area of pirated luxury goods, the benefits seem to far outweigh any perceived risks. Stipp (1996) reports that these goods are said to net some counterfeiters $10,000 a day. The original manufacturer has to consider the possible costs, cash flow burden, penalties, and so forth before thinking of suing the offender. Add to this 12
the problems of foreign imitators having a totally different legislative and legal practice. Thus, the willingness to be innovative in a society is bound up with the legal system. When the laws are restrictive, or interpreted in a restrictive way (to prevent imitators from “inventing by copying”), a higher level of innovation may be taking place in all aspects of the society. When the laws are neither enforced nor interpreted in a restrictive manner, there may be little investment in innovation and more production of imitated products. The past tendency of Asian cultures to imitate or directly copy can be traced to their history and value systems, which are reflected in their legal systems. The traditional method of teaching and, hence, learning is one of copying. From the time children can hold a writing instrument, they are taught to outline, transcribe, and repeat. These cultures are also very family-oriented. The family comes first, and its members provide for one another. The state does not provide, so it is secondary. It is perhaps not a priority to enforce a law that would deny profit to an individual at the expense of a large manufacturer, especially when that large manufacturer is not Asian in origin. Many imitators who come before the courts in China, says Holberton (19951, have no previous criminal record, and magistrates are reluctant to impose the fine of $3,200 per counterfeit object. The issue has become more complex in recent years. Pressure from foreign nationals has led countries such as China to develop laws to curb trademark infringements. In fact, says Birden (19961, in some cases the death penalty is levied by the Chinese courts for counterfeiting consumer goods. As the laws change, we may see the practice of imitation change. Moreover, as the culture becomes more focused on research, the emphasis on imitating may diminish. In summary, consumers may pay more, but they benefit from innovation by having the ability to purchase objects that specifically suit their needs and increase their well-being. Without protection through trademark laws, it is unclear whether innovation would exist as extensively as it does today. However, supporters of imitation argue that one must allow for this type of competition to make sure certain goods are not priced out of the market, thus giving consumers protection against high prices. As Finch (1996) states: This type of free riding serves the greater public good by promoting increased competition. After all, permitting private label manufacturers to copy trade dresses of brand name products helps those manufacturers inform consumers that cheaper alternatives to brand name products are available in the marketplace. If Business Horizons / November-December
1999
consumers are better informed about the available alternatives, brand name products will have to compete with private label products in order to attract and retain customers.. . .Thus, even if a consumer chooses a brand name product rather than a private label, the consumer will likely pay less for it due to the private label competition. IS IMITATION UNFAIR COMPETITION?
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ince %e Wealth of Nations by Adam Smith in 1776, the concept of competition has been the dominant trend in economic theory and politics conducted in the Western world. Pursuant to this philosophy, the absence of competitiveness would only lead to an increase in prices and inefficient allocation. In the ideal competitive market, a successful innovation would soon be imitated and produced by numerous competing companies. In theory, information and thereby innovations would cost nothing. In practice, the imitator does not incur any development expenses and does not pay any interest on the investment of the innovation. Thus, it is not surprising that many firms do imitate what other firms have developed. Imitation
with Source Identity
In his 1994 book Managing Imitation Strategies: How Later Entrants Seize Markets From Pioneers, Steven Schnaars outlines how firms have benefited and flourished by imitating a competitor’s product category, technology, or way of doing business to enter a new market opened or created by the innovator. He espouses imitation as a major strategic tool to do better business by distributing a product of identical or superior quality at lower prices. Another benefit is that imitators may also “leapfrog” the innovator with features that genuinely improve the original product. These new features and lower prices are said to benefit consumers by making goods and services more practical, useful, affordable, and accessible. One argument is that although innovators spend a lot of money and effort in developing their innovations, they may lack the financial resources, market clout, and management skills necessary to transform the innovation into a set of attributes that are even more beneficial to the customer. The key to Schnaars’s argument is that imitators should add value to the original product that can be readily assessed by the customer. Furthermore, his arguments are based on discontinuous innovations or completely new products, and not trademarks per se. Good quality imitators are thus a boon. We define them as adding value by producing goods
of equal value at lowerprices and/orproducing goods with additionalfunctional attributes that enhance theperformance of the original brand orproduct, which is readily perceived by the consumer. With this interpretation, economic efficiency is promoted by greater customer utility through lower costs, better value, or a better product. However, the argument is also made that firms are less likely to expend resources on developing a new product if competing firms with no investment can duplicate the product and produce it at the same marginal cost as the innovator. In this case, note Landes and Posner (19871, economic theory says that competition will drive prices down to marginal costs, and sunk costs of invention will not be recouped. What must be realized is that the value of the original is far greater than just R&D costs, which relate to patents. One must consider what it costs to inform consumers about the innovation or the communicative value of the trademark. Manufacturers protect the identity of their trademark by advertising. This links the mark to the manufacturer by cultivating secondary meaning with each consumer exposure. McDonald’s, one of the largest single product advertisers in the world, spent $1.5 billion on advertising and promotion in 1994.As a matter of course, Gillette factors in advertising expenditures to build its brands. Those with bigger advertising budgets yield substantially higher levels of brand equity. Higher brand equity generates greater purchase preference. Advertising costs must be considered integral to the contract between the brand and the consumer so that the consumer can readily evaluate the standard and quality of the product or service provided. Imitation
w&h Uncertain Source Identity
Although it is difficult to argue theoretically against better quality products, the reality may be that most imitators are not of better quality but may still be accepted as competitors in the marketplace. In a case involving a patented combination lock (U.S. ITC 19791, the owner of the patent demonstrated that a Taiwanese firm had imported and sold infringing locks. But although there was indirect and secondary evidence of consumer
Brand Imitation and Its Effects on Innovation, Competition, and Brand Equity
13
complaints from customers about the quality of the infringing locks, there was no proof of declining sales of the original lock. According to Sloan (19901, it was reasoned that because some customers were dissatisfied with the infringing locks, they would perceive the original as of higher quality, and the manufacturer’s sales would increase. Thus, poor-quality brand imitators are sometimes interpreted (correctly or not) as helping the market as a whole. However, this can only be so when the consumer is aware that the imitator is not the original. If big profits are made in a market, competitors will arrive imitating a business unit or imitating the way of making a profit, Perhaps this is why McDonald’s is constantly being copied all over the world. Fast-food noodles now exist in China, and the workers wear a golden-arches look-alike on their uniforms. Although the consumer knows that the two restaurants serve different food, McDonald’s is unhappy because it believes the similar logo cues its type of service. And McDonald’s cannot guarantee quality to this service, with which it obviously appears to be associated. Other products such as wine bottles (Big Mac), coffee beans (McBeans), and condoms (McCondom) have all tried to cash in on an association with the well-known McDonald’s logo. It is no wonder the company has gone to such trouble to register the whole vocabulary of “MC” prefixes. In competitive markets, then, a successful innovation is soon imitated and produced by numerous competing companies. The imitator may not incur any R&D expenses and need not pay any interest on the investment on the basis of which the innovation was made. However, we must consider more than the initial investment. The costs of informing the consumer about the product or brand through the media need to be factored into the total costs. In relation to the question of whether imitation is good or bad for society as a whole, marketing is only capable of judging the welfare to consumers and the impact on the language of brands. We are unable to converge the opposing economic theories about innovation and competition. From an extreme orthodox point of view, society should avoid legislation and accept imitation, resulting in more competition and lower 14
prices. From a Schumpeterian point of view, competition in the latter sense is not in the interest of society because it may inhibit innovations. This discussion may be quasi-religious, but our contribution relates to only one question: When does imitation misguide consumers, and what consequences does this have? THE LANGUAGE OF BRANDS
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rands have a kind of universal language analogous to stenography. Brand names represent information about a variety of attributes linked to a product, such as its features, meaning, and quality, that words cannot easily replace. This is what we call “brand equity.” Branding makes it easy for consumers to talk about products. Instead of saying, “You should try the cold, black, sweet, fizzy water with caffeine that does not taste like coffee,” you can say, “You should try Coca-Cola.” So we use brand names in our everyday language to be specific in our conversations about which bundle of product attributes and image we refer to. Brands Ensure Quality Successful brands make firms sensitive to the upkeep of quality. The concept of branding or identification leads to an increase in the quality of the offerings in the marketplace. Economic planners in the Soviet Union found that requiring consumer goods manufacturers to imprint their individual “production marks” on products helped guard against deteriorating quality standards. Manufacturers became personally accountable for their goods. When a consumer trusts the brand, decision-making is faster and easier. Anyone who has had to shop in a foreign country, where brands are mostly unknown, can testify to the length and difficulty of the shopping process. Brands Reduce Risk Consumers understand that brands make life easier by reducing the risk of inferior or poorquality goods. Depending upon the situation, the purchase may be irreversible; consumers cannot get their money back or undo their feelings of disappointment if the purchase does not meet their expectations. Even when consumers spend time and effort in the decision process, they may regret a “bad” purchase with hidden features that reduce quality. A careful search for a hotel cannot guarantee a good experience. The guarantee that expectations are met is developed through prior experience or a brand that promises to shorten a search and reduces risk through set standards. Besides actual physical differences in product/service attributes, brands are differentiated in Business Horizons / November-December
1999
terms of the subjective image they impress on the consumer’s mind. Brand image is created through labeling, advertising, package design, and retail distribution. The better the brand’s image, the more the original can charge over its competitors, because consumers are willing to place value on image. Because of this fact, some might say that brands could also make people believe things that are not true. For example, bleach is a solution containing 5.25 percent sodium hypochlorite. The fact that two brands of bleach have the same chemical formula, say Landes and Posner, does not make them of equal quality perceptually. The major brand name in this product category charges significantly more than other competitors because it has created a superior image in the minds of consumers. Consumers are interested not only in the chemical formula but in the manufactured product as well. So they are willing to pay a premium for the assurance of the manufacturing process. Another very good example is the product category of acetylsalicylic acid (ASA, or “aspirin”). It is the perception that drives the purchase, not the technical contents. The consumer will knowingly pay a premium for image and trusted quality. In many cases, this purchase of risk insurance is perceived to be minor to the consumer.
One example of the power of advertising is with the product category of laundry detergent. In 1966, the British Monopolies Commission recommended a 40 percent cut in advertising by Unilever and P&G, accompanied by a 20 percent reduction in household detergent prices. But this did not happen. So the government settled for a compromise whereby the two companies agreed to introduce new, less heavily promoted products priced 20 percent lower than existing brands. The effort is said to have accomplished little, though, largely because the companies refused to admit that the unadvertised product’s quality was equivalent to that of their main brands. Hence, consumers did not buy the unadvertised lower-priced brands of the same objective quality. There was no history of trust in the new brand, nor was new trust created through advertising. Brands Allow a Differentiated Distribution
Brands Communicate Social Status The language of brands is not only used to reduce personal risk of purchase, but also to communicate to other people. What parent doesn’t know the hazards of purchasing the wrong brand of clothing for a teenage son or daughter? Brands express belonging or individualism. Prestigious brands are associated with higher prices; the higher the price, the more one can signal that one is special (rich). Buying a Mercedes-Benz over a Ford Taurus, a Rolex over a Timex, Chanel over Liz Claiborne, Dom Perignon over Seaview, signals a different social status because the first brands cost more. Hence, they may have better standards of quality. The better standard of quality is then reflected on the individual who has the good taste and sense to “own” the brand. Brands Create Trust Blind and branded tests show that consumers believe a known branded product to be of better quality, while judging the same unbranded product as inferior. Although these tests measure product perceptions, Consumer Reports and other independent testing laboratories routinely carry out tests of actual quality levels. Results of these relatively objective tests routinely show major brands within product categories to be inferior to lesser-known brand names. Brand Imitation
and Its Effects on Innovation,
Competition,
Trademarks, trade dress, and brand names also contribute to efficient distribution. The information conveyed by brand names makes it possible to have convenient self-service shopping and thus to realize the efficiencies of supermarkets. Wellknown national brands allow for the success of discount stores, secondhand stores, and store promotions. We can have shopping in sparse environments, bag our own groceries, and accept cluttered shelves because we trust what is inside the branded package and are sure it is the same product sold in more opulent surroundings. Discount retail establishments would probably not be successful without national brand names. In summary, consumers use simple heuristics and often rely on single cues to simplify their decisions. And the most important cue in the global marketplace may be brand name. With this cue, the consumer answers the question, “Do I or do I not trust this firm?” Trusting a firm drastically reduces search costs of time, effort, and risk. DO COUNTERFEITING AND IMITATION DESTROY THE LANGUAGE OF BRANDS?
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wo
issues seem to affect the damage to brands and their equity by those who infringe on their trademarks or trade dress. The first is whether the consumer is aware of the copying; the second has to do with the
and Brand Equity
quality and value of the copy. The literature makes the distinction that counterfeits mislead consumers whereas pirated goods do not, even though both are 100 percent direct copies and are broadly referred to as counterfeit by the law. Consumers may also be mistaken about the origin of imitated goods. The fact that imitations are not 100 percent direct copies may not register on consumers because they perceive the brands to be the same.
Misguidedor Confused Purchasers Consumers always have the right to be informed about their purchases. It is rare for copies, which misguide consumers about their origin, to be of better or even equal quality to the original good. This is because those who produce better or equal copies want consumers to know exactly who did so and to reward them for their efforts, now and in the future. There is also the potential of destroying the whole product category through experiences with poor imitation products. This is especially so when the original defines the product category and there are many product substitutes. A customer who buys a Legoa product expects a certain level of quality. When a customer unknowingly purchases an imitator of Lego@, such as Ligo, and tries to join the new piece with the original without getting a perfect fit, then not only is the language of Lego@ damaged, but perhaps the whole product category of building blocks. A poor image of the brand that defines the product category could then mean a poor image of the whole product category. In the case of Lego@, building blocks give way to other play toys. Children may no longer be given building blocks as gifts, but are now given plasticine or game sets. Another example is Coca-Cola, the definer of the product category of cola beverages. If the perceived image quality of this brand leader declines through misguided purchases, consumers may substitute other cold beverages for cola. Iced tea, water, and citrus-flavored drinks could be used as substitutes because there is no longer any perceived consistency in the purchase of colas. Coke’s return to its curved bottle in the 1990s was an important factor in the brands resurgence in the marketplace. Consumers now had an inherently unique and distinctive product attribute to use to identify the real thing from other competitors when purchasing large, two-liter bottles. Consumers who do not know the true origin of goods and are unable to link the brand to the actual manufacturer will not be able to use the language of brands successfully for communication. The loss of brand language is true for both counterfeit and imitated goods. Over time, the
growth of imitators, which confuse consumers, may eventually destroy the language of brands as the trust, risk reduction, and communication properties of the brands become invalid.
KnowledgeablePurchases When consumers are knowledgeable about the sources of goods, then one may argue, as the luxury counterfeiters do, that there is little harm and perhaps even some benefit to them. Perhaps this is why most imitated and pirated goods seem to be tolerated or given a low priority for elimination. Consumers are not seen as being cheated because they use their own free will to buy these lower-priced but usually lower-quality goods. Naturally they might be disappointed in the quality, but then they would lose trust in the pirated or imitated good. When the good is of better quality, this follows Schnaars’s argument of a contribution to the welfare of society, giving consumers more and better products to choose from. However, not one example of a higher-quality counterfeit, pirated, or imitated good comes to mind. There are perhaps many examples of goods of equal quality, in content, that follow an imitation strategy. They help the social welfare if they are of better value, or priced much lower than the original. One example of this is our basic acceptance of generic drugs. Society is given the option of purchasing a substitute brand at a lower price. If a consumer perceives the poor-quality imitator to be an unsuitable substitute, then the imitating brand may quickly die in the marketplace. This is the hope of many major brand managers. The problem scenario, from a broad marketing point of view, is when the selling price is very low. Then the price-sensitive consumer may still buy the imitator, and its poor quality may destroy the equity of the original brand just by its presence on the market. Destruction
of Brand Equity
The destruction of brand equity is somewhat different than that of the language of brands. Brand equity is something owned by an individual brand that captures consumer response to its marketing efforts. The components of brand equity build on consumers’ knowledge of the brand derived from their brand awareness and its image. Whereas brand awareness can be defined and measured in terms of simple recognition and recall, brand image is a more complex construct derived from different types, favorability, strength, and uniqueness of brand associations. The types of associations are: attitudes toward the brand, both functional and experiential; benefits derived from use of the brand; and perceived product Business Horizons / November-December
1999
attributes, which are product- and nonproductrelated. The demise of a brand’s equity as a result of others imitating it can be traced back to the weakening of the brand’s perceived uniqueness and possible unfavorable associations. Poor-quality imitators or pirated goods may lead to an association effect weighted by negative information. It is like judging one’s worth by the company one keeps. If luxury brands are copied using inferior materials and workmanship and are then knowingly purchased by the masses, the original is seen as losing its exclusivity. Some people want goods simply because they are exclusive. The proliferation of lookalikes would mean the original brand would no longer be exclusive, an inherent attribute of the brand. If exclusivity is the desired important characteristic, then the brand’s equity will be destroyed. Over time, no one would want either the imitator or the original, since it was the image of exclusivity that motivated the purchase. The brand would no longer provide the benefit of the elevated feeling of prestige to those who could afford the original. The problem is that rich people, who own the original, no longer are privy to the image of publicly consumed luxury goods. People wearing a real Rolex watch are now asked if it is fake, a question that does not enhance the experience of owning the real thing. Once the brand loses its appeal to the affluent segment, the imitator will also lose its market because it no longer represents a brand that communicates wealth.
W
hen society finds a brand being copied, it may see the act as plagiarism. Each brand is like a book, a piece of music, or a work of art. The manufacturer is like the author, the composer, or the artist. To copy art, writing, or music without acknowledging its source is plagiarism, which is usually seen as immoral, unethical, and subject to penalties. Perhaps this is why the courts see no difference between counterfeit and pirated goods, and do not ask whether the consumer knows the true origin of the good. Whereas marketing might equate counterfeiters with plagiarists, the link to imitators is more obtuse. Different standards are applied because imitations are not direct copies. Observers determine the perception of imitation and the meaning derived from the brand. Measurements of perceptual confusion as to the origin of the manufacturer are difficult and time-consuming to carry out. The question of whether imitation helps or harms society must be answered from Figure 1, which outlines a combination of the consumers’ perspective and the quality of the imitator good.
High-quality imitators are not a problem to society, and may even benefit the marketplace by providing good competition and more choices for consumers. Equal-quality imitators are only beneficial if they are sold at a lower price. Poorquality imitators may not be a problem to society when consumers can easily judge for themselves that the imitation is inferior. Poor-quality imitators, which are easily identifiable, will probably not have a long market life. In general, there may be a benefit to society or to marketing when imitations are uniquely identified, are knowingly purchased by consumers, and are of better quality and/or value to the consumer. Under these circumstances, original manufacturers may be motivated to further improve their market offerings. To be effective competitors, imitators need to advertise in order to signal to the consumer their existence as a superior substitute for the original brand. Through advertising or word of mouth, the consumer is likely to be informed as to the source of the substitute good. If the imitator is of poorer quality and/or represents less value than the original. then there will probably be no effort to communicate product attributes. Therefore, a key in determining whether the imitator is benefiting society is its level of advertising; this is what leads to knowledgeable consumers. The most serious problems arise when consumers are misguided or misled about the origin of the good, regardless of the quality. In all cases, no matter the value or quality, the language of brands is in danger of being destroyed. Cl References
David A. Asker, Managing Free Press, 1991).
Brand Equity (New York:
Paul B. Birden, Jr., “Trademark Protection in China: Trends and Directions,” Loyola of Los Angeles International and Comparative Law Journal, June 1996, pp.
431-495.
Peter H. Bloch, Ronald F. Bush, and Leland Campbell, “Consumer ‘Accomplices’in Product Counterfeiting: A Demand-Side Investigation,” Journal of Consumer Marketing, 10, 4 (1993): 27-36. Coach Leatherware Co. Inc. v. Ann Taylor Inc., 933 F2d 162, 18 USPQZd 1907 (CA 2 1991). “Court Bans McCondoms,” 1992, p. All.
Vancouver
Sun, March 27,
Andrew Corydon Finch, “When Imitation Is the Sincerest Form of Flattery: Private Label Products and the Role of Intention in Determining Trade Dress Infringement,” University of Chicago Law Review, Summer
1996, pp. 1,243-1,276.
Brand Imitation and Its Effects on Innovation, Competition, and Brand Equity
17
John Kenneth Galbraith, American Capitalism: 7&e Concept of Countervailing Power (Boston: HoughtonMifflin, 1956).
Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper, 1950).
Grotrian, Helferich, and Schultz v. Steinway & Sons, CA2 NY, 523 F2d 1331, 186 USPQ 436 (1975).
Ct 784, 11 L.Ed. 2d 661 (1964).
Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.
Ronald Henkoff, “P&G New and Improved,” Fortune, October 14, 1996, pp. 151-161.
Tracy Lea Sloan, “The 1988 Trade Act and Intellectual Property Cases Before the International Trade Commission,” Santa Clara Law Review, 30 (1990): 293-324.
Simon Holberton, “Beijing Protests Over US. Claims of $30bn Trade Deficit,” Financial Times, October 9, 1995,
David Stipp, “Farewell My Logo,” Fortune, May 27, 1996, pp. 128-140.
p. B3. Kevin Lane Keller, “Conceptualizing, Measuring, and Managing Consumer-based Brand Equity,” Journal of Marketing, January 1993, pp. l-22. William M. Landes and Richard A. Posner, “Trademark Law: An Economic Perspective,” Journal of Law and Economics, October 1987, pp. 265-309.
Strum, Ruger & Co. Inc. v,.Arcadia Machine G Tool Inc., U.S. District Court, Central District of California (1988). US. ITC, In the Matter of Certain Combination Locks: Investigation No. 337-TA-45 (Washington: U.S. International Trade Commission, 1979). Judith Lynne Zaichkowsky, Defending
Owens-Corning Fiberglass Car)., 774 F2d 1116 (Fed Cir 1985).
Your Brand Against Imitation: Consumer Behavior, Marketing Strategies, and Legal Issues (Westport, CT: Quorum Books, 1995).
Joshua Harris Prager, “Viagra (viagra): n. Impotence Pill; vb. To Revive; adj. Lusty; Tireless,” Wall Street Journal, May 7, 1998, p. Bl. John A. Quelch and David Harding, “Brands Versus Private Labels: Fighting to Win,” Harvard Business Review, January-February 1996, pp. 99-109. EM. Scherer and David Ross, Industrial Market Structure and Economic Performance, 3rd ed. (Boston: Houghton-Mifflin, 1990). Steven P. Schnaars, Managing Imitation Strategies: How Later Entrants Seize Markets from Pioneers (Don Mills, Ont.: Free Press, 1994).
Ricky Wilke is a department head and associate professor of marketing at the Copenhagen Business School in Denmark. Judith Lynne Zaichkowsky is a professor of marketing at Simon Fraser University, Burnaby, B.C., Canada.
Business Horizons / November-December 1999
A
lthough the practice of intentionally integrating the name, shape, symbol, color, or “look and feel” of a leading brand to a new brand has been common and well-documented since the mid-1800s its perceived legality and acceptability are elusive. One reason may be that imitating is different from obvious forms of trademark infringement, such as counterfeiting and piracy, which are easy to define and identify. Brand imitation-r “passing off,” in legal language-is based on similarities, and what is perceived to be similar to one party may not be perceived as such by others. Brand leaders, who have to deal with imitators, find it a very expensive, exhaustive, and ongoing process. Lego@, the Danish toy company, has a team of 14 lawyers who handle 30 to 40 cases of brand imitation in 10 to 15 countries at any one time. Because brand imitation is a legal issue involving passing off or “brand confusion,” trademark laws govern it. The problem with laws, however, is that (1) they can change over time, (2) they vary from country to country, (3) they can vary within a country, such as the United States, (4) each case is dealt with separately, and (5) the interpretation of the laws as they apply to each case is made by different people with different experiences, beliefs, and values. International brands like McDonald’s, Lego@, or Disney would prefer to see very restrictive laws against imitation, They view imitators as parasites that suck healthy companies dry. Other firms make their living by imitating-Cott, the soft drink maker, is one-and hence claim that restrictive laws are not good for the marketplace. Private store labels argue that the look of the package defines the product category and not the brand itself. They want the laws to be broadly Brand Imitation
and Its Effects on Innovation,
Competition,
to be discussed in addressing this question: ?? Joseph Schumpeter (1950) wrote that innovation is necessary for societal welfare. Imitation may inhibit innovation so that consumers are worse off. ?? Competition is the heart of a healthy marketplace, says Steven Schnaars (1994). When imitation is a form of competition, then the market may become more efficient. ?? When imitation misguides, misleads, or confuses consumers, there is deception in the marketplace that can destroy the language of brands and devalue whole product categories. These arguments will be reviewed here, using the framework depicted in Figure 1, to assess when imitation benefits society and at what costs. The issue goes far beyond protecting brand names, trademarks, or trade dress; imitation may affect consumers’ very faith in the marketplace. IMITATION VERSUS COUNTERFEITING
C
ounterfeiting refers to a “direct” copy. But imitators need not copy directly; they need only borrow or copy some aspects or attributes of the original. Manufacturers tend
and Brand Equity
9
consumers that the good is counterfeit. Such a case is usually referred to as piracy, since the manufacturer’s intention is not to deceive the consumer on QUALITY OF IMITATOR COMPARED TO ORIGINAL. the true origin of the good. The consumer may consciously seek Better Equal Worse out and purchase these fake products through purchase location, low pricing, obvious differDepends on price Has potential to Society ences in design details, quality, destroy equity ratio: better value, better off of original brand society better off or other observable features. Examples are pirated CDs, video games, and computer software sold at low prices, often with inferior packaging. Destroys the language LJtXr”p Destroys Usually the courts side with of brands and can the language th e language the manufacturer and see no destroy the whole of brands of brands product category difference between pirated goods and counterfeit goods. They do not take into account the many eager and satisfied consumers of “fake” CDs, software, or luxury goods. Some counterfeiters, renot to differentiate between imitators and counports Stipp (1996), use this argument to justify terfeiters. Both can create similar problems for their actions: original brands because both infringe on the original’s image and profits. Losses in sales due I tell my customers it’s a copy.. . .People to counterfeiting are estimated at $200 billion can’t afford the real stuff. Take Chanel. annually in the United States alone. Sales losses Their quality is great, but the bags aren’t due to imitators easily surpass this, because there worth the price people pay. They have are many more imitators or look-alikes than di$2,800 bags I’ll sell you for $150.. .We’re rect copies. While courts may fail to recognize doing a service by allowing people to imitators as illegal competitors, original brands have a dream. may think of them as unfair competitors.
Figure 1 Assessing the Benefits and Costs of Imitation Brands
I
n__*.._.
I
Counterfeit Copies The law takes the position that counterfeiting may harm society at large, especially when the counterfeit is not a direct copy in quality, only packaged or manufactured to look like the original. When the counterfeit is sold at near the price of the original and consumers cannot judge the quality (as in credence goods) and are misled by the brand name, trademark, or trade dress, then they may think the counterfeit good is the original. If the quality of the ingredients or manufacturing process is inferior, individual consumers or even whole nations may be harmed. Kenya is reported to have lost a substantial portion of its coffee crop after farmers unknowingly used ineffective counterfeit fertilizers. Counterfeit drugs, including birth control, are sold to developing countries, resulting in ineffective treatments. Some airplane crashes are attributed to counterfeit parts, which rarely meet federal safety standards. Counterfeit auto parts are said to last only 5 to 25 percent as long as genuine parts. When a counterfeit is sold at a fraction of the usual selling price, this is said to be a signal to 10
However, it may be arrogant to assume that customers know a good is counterfeited based on its low price. They may assume it is stolen merchandise. Or they may think the seller has obtained the goods through parallel import arrangements, because it is not unusual for goods to sell at a lower price in a foreign country than they do in a domestic market.* Consumers also may not know what a reasonable selling price might be for the good. So although the original manufacturer and some consumers know that the good is pirated, this may not be enough evidence to show that the majority of the consumers know it is a “counterfeit.” Counterfeit luxury goods, such as those of Cartier, Chanel, and so on, provide an elevated feeling to consumers who cannot or will not pay for the original. They allow lower-income people to have a little brush with prestige, appear more affluent from a distance, and perhaps feel better about themselves. However, they may also damage the image and equity of the original brand. *Ed. note: See M. Myers and D. Griffith, ‘Strategiesfor Combating Gray Market Activity, ” in this issue. Business Horizons / November-December
1999
Very little public money is spent investigating luxury counterfeits; the fight is left to private detectives hired by companies and trade groups. Once the case is before the courts, however, there is pressure to treat pirated goods and counterfeit goods equally under the law. Imitation Copies Imitators are far more difficult to deal with because the goods are not identical to an acknowledged and widely known product or service in the marketplace, only similar in substance, name, shape, and color. The problem is that to say two things are similar in having a specified property in common is nothing more than saying they hav-e that property in common. Comparative judgments of similarity often require weighting the relative importance of the product attributes. The variation in perceived relevance and importance of the product attributes can be rapid and enormous. What makes two attributes alike depends not only on what properties they share, but who makes that comparison and when. To compensate for the difficulties in articulating similarities, most comparisons focus on the differences. So the opinions on the acceptance of imitations are much wider than for pirated goods. From a social welfare perspective, the difference between counterfeiting and imitation may be moot. Consumers may suffer the same consequences from buying imitations as from buying counterfeits. This is because sometimes consumers are not aware of the original manufacturer and sometimes they are, just as with counterfeit goods. The original manufacturer believes imitation always harms the broader social welfare of the marketplace by inhibiting the introduction of innovative new brands, competing unfairly, and destroying brand language. DOES IMITATION INHIBIT INNOVATION? conomists such as Schumpeter and Galbraith have argued in favor of monopolies and big companies, respectively, as being the locomotives of innovation. Big companies often have the capacity to maintain specialized R&D departments. They have routines regarding innovative structures and competencies, which is by definition a catalyst of innovation. Even when a lot of innovative ideas are generated in small firms, the firms often lack the resources to support such marketing activities as distribution and branding. This is why a company like Microsoft finds success in buying small firms with innovative products and bundling those products with its existing ones (and existing channels). It is very important to make the distinction between innovation as a strategically planned
E
Brand
Imitation
and Its Effects
on Innovation,
Competition,
process and innovation as an outcome or product. When imitation supports small companies eager to attain capital by imitating the innovation, and they consequently discover something new and make improvements in the innovation, then imitation is good for society. Therefore, imitation is good if learning results or if it is serendipitous in nature. It is also important to note that the issue is larger than information protected by patents and copyrights. The trademarks associated with patents and copyrights affix good will. Trademarks communicate to consumers verifiable features for distinguishing different products, whereas patents and copyrights only protect unique characteristics. Consumers do not rely on patents to communicate quality; trademarks do that. Innovation Is an Investment Cost If innovators could not at least recover the cost of product development, then there would be no incentive to invest in innovations. While the patent system creates a temporary monopoly in order to provide a sufficient payback on investments to motivate future inventors, it also functions as a diffusion mechanism by documenting and making public the content of the innovations. This knowledge can then be used by other inventors in their inventive activities. Allowing more people to exploit the same knowledge instead of just the monopoly firm creates an advantage for society. When firms gain protection under the Trademark Act, they can recover their sunk costs. So they are able and willing to invest in all the expenses associated with innovative behavior, improving the product linked with the brand name and creating new products to add to their brand repertoire. Even everyday language benefits from innovations by creating new words that help articulate communication in society. The most recent example is Viagra, the brand name of the impotence pill by Pfizer. This word is now used as a noun (impotence pill), a verb (to revive), and an adjective (lusty, tireless). According to Prager (19981, journalists from Barvon $ Time, and many daily newspapers have integrated the brand name in their writings to connote resurrection, jump-starts, vim, and value. Most important, brands reduce search costs and risks for consumers in the buying process. New brands give consumers more choices with different attributes to pick from, which may be in the consumers’ interests. Take Gillette, for example. Its goal is that 40 percent of its sales every five years must come from entirely new products, not just line extensions. The Sensor razor that is said to have taken 10 years to perfect exemplifies the time, money, and effort spent on innovation.
and Brand
Equity
11
It is doubtful that Gillette would be so committed to this strategy if it felt its efforts would not be protected under its world-famous brand name. Therefore, protection from imitation actually may provide more products from which the consumer can choose. An older and perhaps more established company is Procter & Gamble. It deals regularly with imitation of a large number of brands, especially such historic ones as Tide laundry detergent and Head & Shoulders shampoo. P&G has made 70 ments to Tide sinc:e the brand’s launch in 1956,with the core promise that it will get clothes cleaner than any other laundry detergent on the market. The firm’s consistent investment in product improvements enhances Tide’s perceived superiority and provides the basis for information to differentiate brands. P&G devotes $1.2 billion annually to research and development, holding more than 2,500 active patents and employing 1,250 Ph.D. scientists. The company is clearly committed to innovation through research. Because of this commitment to introducing new products, it is in the interest of consumers and society that firms cannot easily imitate each other. So a restrictive trademark law can be seen as being in consumers’ interest because the development of new brands gives them the possibility to choose among brands with different attributes, to have a broad category of brands at their disposal, and to live in a society that values new process technologies. Imitation
Is a Legal Cost
The public announcement inherent in innovation in a certain field will spread the news and the novelty to other parts of the corporate sector. However, it may also have a negative effect in that it provides specific information to the real imitators, who make an “almost” direct copy of the innovation. The incentive on the part of the imitators to infringe on or test a monopoly depends on the risk and inherent consequences of a lawsuit. In the area of pirated luxury goods, the benefits seem to far outweigh any perceived risks. Stipp (1996) reports that these goods are said to net some counterfeiters $10,000 a day. The original manufacturer has to consider the possible costs, cash flow burden, penalties, and so forth before thinking of suing the offender. Add to this 12
the problems of foreign imitators having a totally different legislative and legal practice. Thus, the willingness to be innovative in a society is bound up with the legal system. When the laws are restrictive, or interpreted in a restrictive way (to prevent imitators from “inventing by copying”), a higher level of innovation may be taking place in all aspects of the society. When the laws are neither enforced nor interpreted in a restrictive manner, there may be little investment in innovation and more production of imitated products. The past tendency of Asian cultures to imitate or directly copy can be traced to their history and value systems, which are reflected in their legal systems. The traditional method of teaching and, hence, learning is one of copying. From the time children can hold a writing instrument, they are taught to outline, transcribe, and repeat. These cultures are also very family-oriented. The family comes first, and its members provide for one another. The state does not provide, so it is secondary. It is perhaps not a priority to enforce a law that would deny profit to an individual at the expense of a large manufacturer, especially when that large manufacturer is not Asian in origin. Many imitators who come before the courts in China, says Holberton (19951, have no previous criminal record, and magistrates are reluctant to impose the fine of $3,200 per counterfeit object. The issue has become more complex in recent years. Pressure from foreign nationals has led countries such as China to develop laws to curb trademark infringements. In fact, says Birden (19961, in some cases the death penalty is levied by the Chinese courts for counterfeiting consumer goods. As the laws change, we may see the practice of imitation change. Moreover, as the culture becomes more focused on research, the emphasis on imitating may diminish. In summary, consumers may pay more, but they benefit from innovation by having the ability to purchase objects that specifically suit their needs and increase their well-being. Without protection through trademark laws, it is unclear whether innovation would exist as extensively as it does today. However, supporters of imitation argue that one must allow for this type of competition to make sure certain goods are not priced out of the market, thus giving consumers protection against high prices. As Finch (1996) states: This type of free riding serves the greater public good by promoting increased competition. After all, permitting private label manufacturers to copy trade dresses of brand name products helps those manufacturers inform consumers that cheaper alternatives to brand name products are available in the marketplace. If Business Horizons / November-December
1999
consumers are better informed about the available alternatives, brand name products will have to compete with private label products in order to attract and retain customers.. . .Thus, even if a consumer chooses a brand name product rather than a private label, the consumer will likely pay less for it due to the private label competition. IS IMITATION UNFAIR COMPETITION?
S
ince %e Wealth of Nations by Adam Smith in 1776, the concept of competition has been the dominant trend in economic theory and politics conducted in the Western world. Pursuant to this philosophy, the absence of competitiveness would only lead to an increase in prices and inefficient allocation. In the ideal competitive market, a successful innovation would soon be imitated and produced by numerous competing companies. In theory, information and thereby innovations would cost nothing. In practice, the imitator does not incur any development expenses and does not pay any interest on the investment of the innovation. Thus, it is not surprising that many firms do imitate what other firms have developed. Imitation
with Source Identity
In his 1994 book Managing Imitation Strategies: How Later Entrants Seize Markets From Pioneers, Steven Schnaars outlines how firms have benefited and flourished by imitating a competitor’s product category, technology, or way of doing business to enter a new market opened or created by the innovator. He espouses imitation as a major strategic tool to do better business by distributing a product of identical or superior quality at lower prices. Another benefit is that imitators may also “leapfrog” the innovator with features that genuinely improve the original product. These new features and lower prices are said to benefit consumers by making goods and services more practical, useful, affordable, and accessible. One argument is that although innovators spend a lot of money and effort in developing their innovations, they may lack the financial resources, market clout, and management skills necessary to transform the innovation into a set of attributes that are even more beneficial to the customer. The key to Schnaars’s argument is that imitators should add value to the original product that can be readily assessed by the customer. Furthermore, his arguments are based on discontinuous innovations or completely new products, and not trademarks per se. Good quality imitators are thus a boon. We define them as adding value by producing goods
of equal value at lowerprices and/orproducing goods with additionalfunctional attributes that enhance theperformance of the original brand orproduct, which is readily perceived by the consumer. With this interpretation, economic efficiency is promoted by greater customer utility through lower costs, better value, or a better product. However, the argument is also made that firms are less likely to expend resources on developing a new product if competing firms with no investment can duplicate the product and produce it at the same marginal cost as the innovator. In this case, note Landes and Posner (19871, economic theory says that competition will drive prices down to marginal costs, and sunk costs of invention will not be recouped. What must be realized is that the value of the original is far greater than just R&D costs, which relate to patents. One must consider what it costs to inform consumers about the innovation or the communicative value of the trademark. Manufacturers protect the identity of their trademark by advertising. This links the mark to the manufacturer by cultivating secondary meaning with each consumer exposure. McDonald’s, one of the largest single product advertisers in the world, spent $1.5 billion on advertising and promotion in 1994.As a matter of course, Gillette factors in advertising expenditures to build its brands. Those with bigger advertising budgets yield substantially higher levels of brand equity. Higher brand equity generates greater purchase preference. Advertising costs must be considered integral to the contract between the brand and the consumer so that the consumer can readily evaluate the standard and quality of the product or service provided. Imitation
w&h Uncertain Source Identity
Although it is difficult to argue theoretically against better quality products, the reality may be that most imitators are not of better quality but may still be accepted as competitors in the marketplace. In a case involving a patented combination lock (U.S. ITC 19791, the owner of the patent demonstrated that a Taiwanese firm had imported and sold infringing locks. But although there was indirect and secondary evidence of consumer
Brand Imitation and Its Effects on Innovation, Competition, and Brand Equity
13
complaints from customers about the quality of the infringing locks, there was no proof of declining sales of the original lock. According to Sloan (19901, it was reasoned that because some customers were dissatisfied with the infringing locks, they would perceive the original as of higher quality, and the manufacturer’s sales would increase. Thus, poor-quality brand imitators are sometimes interpreted (correctly or not) as helping the market as a whole. However, this can only be so when the consumer is aware that the imitator is not the original. If big profits are made in a market, competitors will arrive imitating a business unit or imitating the way of making a profit, Perhaps this is why McDonald’s is constantly being copied all over the world. Fast-food noodles now exist in China, and the workers wear a golden-arches look-alike on their uniforms. Although the consumer knows that the two restaurants serve different food, McDonald’s is unhappy because it believes the similar logo cues its type of service. And McDonald’s cannot guarantee quality to this service, with which it obviously appears to be associated. Other products such as wine bottles (Big Mac), coffee beans (McBeans), and condoms (McCondom) have all tried to cash in on an association with the well-known McDonald’s logo. It is no wonder the company has gone to such trouble to register the whole vocabulary of “MC” prefixes. In competitive markets, then, a successful innovation is soon imitated and produced by numerous competing companies. The imitator may not incur any R&D expenses and need not pay any interest on the investment on the basis of which the innovation was made. However, we must consider more than the initial investment. The costs of informing the consumer about the product or brand through the media need to be factored into the total costs. In relation to the question of whether imitation is good or bad for society as a whole, marketing is only capable of judging the welfare to consumers and the impact on the language of brands. We are unable to converge the opposing economic theories about innovation and competition. From an extreme orthodox point of view, society should avoid legislation and accept imitation, resulting in more competition and lower 14
prices. From a Schumpeterian point of view, competition in the latter sense is not in the interest of society because it may inhibit innovations. This discussion may be quasi-religious, but our contribution relates to only one question: When does imitation misguide consumers, and what consequences does this have? THE LANGUAGE OF BRANDS
B
rands have a kind of universal language analogous to stenography. Brand names represent information about a variety of attributes linked to a product, such as its features, meaning, and quality, that words cannot easily replace. This is what we call “brand equity.” Branding makes it easy for consumers to talk about products. Instead of saying, “You should try the cold, black, sweet, fizzy water with caffeine that does not taste like coffee,” you can say, “You should try Coca-Cola.” So we use brand names in our everyday language to be specific in our conversations about which bundle of product attributes and image we refer to. Brands Ensure Quality Successful brands make firms sensitive to the upkeep of quality. The concept of branding or identification leads to an increase in the quality of the offerings in the marketplace. Economic planners in the Soviet Union found that requiring consumer goods manufacturers to imprint their individual “production marks” on products helped guard against deteriorating quality standards. Manufacturers became personally accountable for their goods. When a consumer trusts the brand, decision-making is faster and easier. Anyone who has had to shop in a foreign country, where brands are mostly unknown, can testify to the length and difficulty of the shopping process. Brands Reduce Risk Consumers understand that brands make life easier by reducing the risk of inferior or poorquality goods. Depending upon the situation, the purchase may be irreversible; consumers cannot get their money back or undo their feelings of disappointment if the purchase does not meet their expectations. Even when consumers spend time and effort in the decision process, they may regret a “bad” purchase with hidden features that reduce quality. A careful search for a hotel cannot guarantee a good experience. The guarantee that expectations are met is developed through prior experience or a brand that promises to shorten a search and reduces risk through set standards. Besides actual physical differences in product/service attributes, brands are differentiated in Business Horizons / November-December
1999
terms of the subjective image they impress on the consumer’s mind. Brand image is created through labeling, advertising, package design, and retail distribution. The better the brand’s image, the more the original can charge over its competitors, because consumers are willing to place value on image. Because of this fact, some might say that brands could also make people believe things that are not true. For example, bleach is a solution containing 5.25 percent sodium hypochlorite. The fact that two brands of bleach have the same chemical formula, say Landes and Posner, does not make them of equal quality perceptually. The major brand name in this product category charges significantly more than other competitors because it has created a superior image in the minds of consumers. Consumers are interested not only in the chemical formula but in the manufactured product as well. So they are willing to pay a premium for the assurance of the manufacturing process. Another very good example is the product category of acetylsalicylic acid (ASA, or “aspirin”). It is the perception that drives the purchase, not the technical contents. The consumer will knowingly pay a premium for image and trusted quality. In many cases, this purchase of risk insurance is perceived to be minor to the consumer.
One example of the power of advertising is with the product category of laundry detergent. In 1966, the British Monopolies Commission recommended a 40 percent cut in advertising by Unilever and P&G, accompanied by a 20 percent reduction in household detergent prices. But this did not happen. So the government settled for a compromise whereby the two companies agreed to introduce new, less heavily promoted products priced 20 percent lower than existing brands. The effort is said to have accomplished little, though, largely because the companies refused to admit that the unadvertised product’s quality was equivalent to that of their main brands. Hence, consumers did not buy the unadvertised lower-priced brands of the same objective quality. There was no history of trust in the new brand, nor was new trust created through advertising. Brands Allow a Differentiated Distribution
Brands Communicate Social Status The language of brands is not only used to reduce personal risk of purchase, but also to communicate to other people. What parent doesn’t know the hazards of purchasing the wrong brand of clothing for a teenage son or daughter? Brands express belonging or individualism. Prestigious brands are associated with higher prices; the higher the price, the more one can signal that one is special (rich). Buying a Mercedes-Benz over a Ford Taurus, a Rolex over a Timex, Chanel over Liz Claiborne, Dom Perignon over Seaview, signals a different social status because the first brands cost more. Hence, they may have better standards of quality. The better standard of quality is then reflected on the individual who has the good taste and sense to “own” the brand. Brands Create Trust Blind and branded tests show that consumers believe a known branded product to be of better quality, while judging the same unbranded product as inferior. Although these tests measure product perceptions, Consumer Reports and other independent testing laboratories routinely carry out tests of actual quality levels. Results of these relatively objective tests routinely show major brands within product categories to be inferior to lesser-known brand names. Brand Imitation
and Its Effects on Innovation,
Competition,
Trademarks, trade dress, and brand names also contribute to efficient distribution. The information conveyed by brand names makes it possible to have convenient self-service shopping and thus to realize the efficiencies of supermarkets. Wellknown national brands allow for the success of discount stores, secondhand stores, and store promotions. We can have shopping in sparse environments, bag our own groceries, and accept cluttered shelves because we trust what is inside the branded package and are sure it is the same product sold in more opulent surroundings. Discount retail establishments would probably not be successful without national brand names. In summary, consumers use simple heuristics and often rely on single cues to simplify their decisions. And the most important cue in the global marketplace may be brand name. With this cue, the consumer answers the question, “Do I or do I not trust this firm?” Trusting a firm drastically reduces search costs of time, effort, and risk. DO COUNTERFEITING AND IMITATION DESTROY THE LANGUAGE OF BRANDS?
T
wo
issues seem to affect the damage to brands and their equity by those who infringe on their trademarks or trade dress. The first is whether the consumer is aware of the copying; the second has to do with the
and Brand Equity
quality and value of the copy. The literature makes the distinction that counterfeits mislead consumers whereas pirated goods do not, even though both are 100 percent direct copies and are broadly referred to as counterfeit by the law. Consumers may also be mistaken about the origin of imitated goods. The fact that imitations are not 100 percent direct copies may not register on consumers because they perceive the brands to be the same.
Misguidedor Confused Purchasers Consumers always have the right to be informed about their purchases. It is rare for copies, which misguide consumers about their origin, to be of better or even equal quality to the original good. This is because those who produce better or equal copies want consumers to know exactly who did so and to reward them for their efforts, now and in the future. There is also the potential of destroying the whole product category through experiences with poor imitation products. This is especially so when the original defines the product category and there are many product substitutes. A customer who buys a Legoa product expects a certain level of quality. When a customer unknowingly purchases an imitator of Lego@, such as Ligo, and tries to join the new piece with the original without getting a perfect fit, then not only is the language of Lego@ damaged, but perhaps the whole product category of building blocks. A poor image of the brand that defines the product category could then mean a poor image of the whole product category. In the case of Lego@, building blocks give way to other play toys. Children may no longer be given building blocks as gifts, but are now given plasticine or game sets. Another example is Coca-Cola, the definer of the product category of cola beverages. If the perceived image quality of this brand leader declines through misguided purchases, consumers may substitute other cold beverages for cola. Iced tea, water, and citrus-flavored drinks could be used as substitutes because there is no longer any perceived consistency in the purchase of colas. Coke’s return to its curved bottle in the 1990s was an important factor in the brands resurgence in the marketplace. Consumers now had an inherently unique and distinctive product attribute to use to identify the real thing from other competitors when purchasing large, two-liter bottles. Consumers who do not know the true origin of goods and are unable to link the brand to the actual manufacturer will not be able to use the language of brands successfully for communication. The loss of brand language is true for both counterfeit and imitated goods. Over time, the
growth of imitators, which confuse consumers, may eventually destroy the language of brands as the trust, risk reduction, and communication properties of the brands become invalid.
KnowledgeablePurchases When consumers are knowledgeable about the sources of goods, then one may argue, as the luxury counterfeiters do, that there is little harm and perhaps even some benefit to them. Perhaps this is why most imitated and pirated goods seem to be tolerated or given a low priority for elimination. Consumers are not seen as being cheated because they use their own free will to buy these lower-priced but usually lower-quality goods. Naturally they might be disappointed in the quality, but then they would lose trust in the pirated or imitated good. When the good is of better quality, this follows Schnaars’s argument of a contribution to the welfare of society, giving consumers more and better products to choose from. However, not one example of a higher-quality counterfeit, pirated, or imitated good comes to mind. There are perhaps many examples of goods of equal quality, in content, that follow an imitation strategy. They help the social welfare if they are of better value, or priced much lower than the original. One example of this is our basic acceptance of generic drugs. Society is given the option of purchasing a substitute brand at a lower price. If a consumer perceives the poor-quality imitator to be an unsuitable substitute, then the imitating brand may quickly die in the marketplace. This is the hope of many major brand managers. The problem scenario, from a broad marketing point of view, is when the selling price is very low. Then the price-sensitive consumer may still buy the imitator, and its poor quality may destroy the equity of the original brand just by its presence on the market. Destruction
of Brand Equity
The destruction of brand equity is somewhat different than that of the language of brands. Brand equity is something owned by an individual brand that captures consumer response to its marketing efforts. The components of brand equity build on consumers’ knowledge of the brand derived from their brand awareness and its image. Whereas brand awareness can be defined and measured in terms of simple recognition and recall, brand image is a more complex construct derived from different types, favorability, strength, and uniqueness of brand associations. The types of associations are: attitudes toward the brand, both functional and experiential; benefits derived from use of the brand; and perceived product Business Horizons / November-December
1999
attributes, which are product- and nonproductrelated. The demise of a brand’s equity as a result of others imitating it can be traced back to the weakening of the brand’s perceived uniqueness and possible unfavorable associations. Poor-quality imitators or pirated goods may lead to an association effect weighted by negative information. It is like judging one’s worth by the company one keeps. If luxury brands are copied using inferior materials and workmanship and are then knowingly purchased by the masses, the original is seen as losing its exclusivity. Some people want goods simply because they are exclusive. The proliferation of lookalikes would mean the original brand would no longer be exclusive, an inherent attribute of the brand. If exclusivity is the desired important characteristic, then the brand’s equity will be destroyed. Over time, no one would want either the imitator or the original, since it was the image of exclusivity that motivated the purchase. The brand would no longer provide the benefit of the elevated feeling of prestige to those who could afford the original. The problem is that rich people, who own the original, no longer are privy to the image of publicly consumed luxury goods. People wearing a real Rolex watch are now asked if it is fake, a question that does not enhance the experience of owning the real thing. Once the brand loses its appeal to the affluent segment, the imitator will also lose its market because it no longer represents a brand that communicates wealth.
W
hen society finds a brand being copied, it may see the act as plagiarism. Each brand is like a book, a piece of music, or a work of art. The manufacturer is like the author, the composer, or the artist. To copy art, writing, or music without acknowledging its source is plagiarism, which is usually seen as immoral, unethical, and subject to penalties. Perhaps this is why the courts see no difference between counterfeit and pirated goods, and do not ask whether the consumer knows the true origin of the good. Whereas marketing might equate counterfeiters with plagiarists, the link to imitators is more obtuse. Different standards are applied because imitations are not direct copies. Observers determine the perception of imitation and the meaning derived from the brand. Measurements of perceptual confusion as to the origin of the manufacturer are difficult and time-consuming to carry out. The question of whether imitation helps or harms society must be answered from Figure 1, which outlines a combination of the consumers’ perspective and the quality of the imitator good.
High-quality imitators are not a problem to society, and may even benefit the marketplace by providing good competition and more choices for consumers. Equal-quality imitators are only beneficial if they are sold at a lower price. Poorquality imitators may not be a problem to society when consumers can easily judge for themselves that the imitation is inferior. Poor-quality imitators, which are easily identifiable, will probably not have a long market life. In general, there may be a benefit to society or to marketing when imitations are uniquely identified, are knowingly purchased by consumers, and are of better quality and/or value to the consumer. Under these circumstances, original manufacturers may be motivated to further improve their market offerings. To be effective competitors, imitators need to advertise in order to signal to the consumer their existence as a superior substitute for the original brand. Through advertising or word of mouth, the consumer is likely to be informed as to the source of the substitute good. If the imitator is of poorer quality and/or represents less value than the original. then there will probably be no effort to communicate product attributes. Therefore, a key in determining whether the imitator is benefiting society is its level of advertising; this is what leads to knowledgeable consumers. The most serious problems arise when consumers are misguided or misled about the origin of the good, regardless of the quality. In all cases, no matter the value or quality, the language of brands is in danger of being destroyed. Cl References
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Ricky Wilke is a department head and associate professor of marketing at the Copenhagen Business School in Denmark. Judith Lynne Zaichkowsky is a professor of marketing at Simon Fraser University, Burnaby, B.C., Canada.
Business Horizons / November-December 1999