How can your brand get the moat of 'Soft Power'?

The way brands are built has changed drastically in the last decade and having a moat of soft power will increase the longevity of brands.

This essay is inspired by an article in The Generalist by Mario Gabriele(1P) where I recently came across the concept of Soft Power and how it intersects with marketing. I have linked that article at the end of this essay. I have attempted to develop this concept more fully in this essay.

The Hypothesis

The way brands are built through marketing has changed dramatically in the last decade, and brands need new ways to achieve competitive advantage. Building soft power can act as a moat for a brand, providing it a sustainable competitive advantage.

Brands are in a state of churn

This statement may sound very "fortune cookie" type, but that's the truth. Incumbent brands struggle to hold on to market share and mind share in the face of a constant onslaught from new brands. But if you still think that the very premise of this essay is based on a fortune cookie statement, let's look at the two tables below.

Shared below is a snapshot of the top 20 brands globally by Brand Finance in 2011 (link).

Shared below is a snapshot of the top 20 brands in the world in 2021, 10 years later, again by Brand Finance (link)

  • Only 5 brands from the 2011 list made it to the 2021 list. In just 10 years, 75% of the top brands dropped out of the list. And these are not mom-and-pop store brands but global powerhouses such as Coca-Cola, GE, Toyota, and AT&T. Even the best and the largest brands in the world cannot deal with brand headwinds for just 10 years.

  • The total brand value of the top 20 brands in 2021 is more than thrice the value of the top 20 brands in 2011. In fact, the brand value of just the top three brands in 2021 (Apple, Amazon, and Google) is more than the brand value of all 20 brands in 2011. The amount of investment being made by companies to build strong brands has gone through the roof in the last 10 years.

This constant brand churn is true across mobile phones, insurance, finance, telecom, healthcare, etc. Today it is easier than ever to launch a new brand and scale it up rapidly, but it is more difficult than ever for an existing brand to protect its market share and mind share.

At this point, if you don't want to look at the reasons for brand churn, you skip to the section 'What's soft power (and what's hard power).'

What's led to this change?

Several things have changed in the last few years, but to my mind, these are the two things that have fundamentally altered how brands are built: (a) Everything as a service (b) Easy availability of risk capital.

Everything as a service

Cloud computing is a game-changing technological change that makes everything available to a brand 'as a service,' ranging from the tech stack, applications, and e-commerce. This has led to the following three changes:

  • It is significantly cheaper to build and deploy large, complex computing infrastructure.

  • It has significantly reduced the 'blank-slate friction' when building a new business/brand as no large investment in tech is needed. A Brand can launch and scale up or scale down the infrastructure as needed. Large API companies like Twilio and Postman can plug and play with your systems, further reducing the time to market.

  • Access to the tech stack is no longer a competitive advantage.  If both Netflix and I run my OTT app using AWS, there's hardly any competitive advantage that Netflix has over me from the tech stack.

Easy availability of risk capital

Cloud computing may have solved the getting started part of the puzzle, but a company still needs to acquire customers. Product development, brand awareness, promotions, discounts, distribution - all of these need significant investment. Large companies can make these investments due to the size of their balance sheets and decades of operations. Access to this investment acts as a competitive advantage against new entrants in the industry.

However, the age of risk capital has changed the game.

As per pitchbook estimate(2), between 2011 and 2020, the VC investment in the US alone grew ~3.5 times from US$ 45.2 Bn to US$  147.9 Bn, showing the scale of availability of risk capital.

The availability of risk capital allows new brands to (a) run high-velocity customer acquisition campaigns by offering significant discounts/cashback (b) invest in high-quality products.

Capital availability also enables new brands to acquire high-quality talent by offering compensation at par (and at times better) with the incumbents.

Thus, the ability of new brands to raise risk capital that matches in quantum of investments available with incumbents has eroded any marketing advantage that incumbents had, making it a level playing field for new and old companies.

What's soft power (and what's hard power)

The term soft power was made popular by Joseph Nye (Former Dean of the Harvard's Kennedy School of Government) in his essay 'Soft Power,' published in 1990 in the Foreign Policy journal(3). He covered it subsequently in other articles and speeches(4, 5). He uses these terms in the context of the power exhibited by countries as part of their foreign policy and actions.

Nye defines power as:

Power is the ability to affect others to obtain the outcomes you want.

Nye defines hard power for a nation as:

Everyone is familiar with hard power. We know that military and economic might often get others to change their position. Hard power can rest on inducements ("carrots") or threats ("sticks").

Thus, the hard power of a nation is its ability to drive action it wants using military power, economic sanctions, economic grants, etc.

Nye introduces soft power as (emphasis mine)

These trends suggest a second, more attractive way of exercising power than traditional means. A state may achieve the outcomes it prefers in world politics because other states want to follow it or have agreed to a situation that produces such effects. In this sense, it is just as important to set the agenda and structure the situations in world politics as to get others to change in particular cases. This second aspect of power-which occurs when one country gets other countries to want what it wants-might be called co-optive or soft power in contrast with the hard or command power of ordering others to do what it wants.

Thus, a nation wields soft power when it can persuade other countries to toe its line without any coercion or incentives. It works by structuring context and creating a narrative that is favorable for the nation.

Nye gives an example of the large size of the US domestic market as soft power. The market size lures foreign companies, but the US Govt sets the regulation and competitive context with direct control over how these companies operate. The market size provides the US soft power that can be used against the countries of origin of these companies.

He gives another example of soft power that sits inside religion:

Sometimes I can affect your behavior without commanding it. If you believe that my objectives are legitimate, I may be able to persuade you without using threats or inducements. For example, loyal Catholics may follow the Pope's teaching on capital punishment not because of a threat of excommunication, but out of respect for his moral authority.

Nye unpacks soft power further by saying that it is the 'power to attract' (emphasis mine)

Soft power is not merely the same as influence. After all, influence can also rest on the hard power of threats or payments. And soft power is more than just persuasion or the ability to move people by argument, though that is an important part of it. It is also the ability to attract, and attraction often leads to acquiescence. Simply put, in behavioral terms, soft power is attractive power.

Lastly, it is interesting to see how the sources of soft power differ from hard power as per Nye:

The soft power of a country rests primarily on three resources: its culture (in places where it is attractive to others), its political values (when it lives up to them at home and abroad), and its foreign policies (when they are seen as legitimate and having moral authority).

The sources of hard power are tangible - the size of the economy, industrialization of the economy, size and modernization of the military, etc. In comparison, the sources of soft power are highly intangible and rely much more on effective communication to the receivers than hard power.

The power wielded by a country is an interplay of hard power and soft power derived from different sources.

There are several other interesting points that Nye makes in his essays, but I will cut to the chase here - How is any of this foreign policy mumbo-jumbo relevant to any brand (links to the essays by Nye are in the footnotes).

Soft Power and brands

For brands, hard power includes traditional brand-building and customer acquisition - advertisements, PR, content marketing, website, social media, etc.

All of these align strongly with the definition of hard power as the resources needed to create these depend on the size of the balance sheet of the company, number of employees, physical presence across countries, etc.

On the other hand, soft power for brands doesn't depend solely on these resources to make the brand more attractive. The table below summarizes what soft power means for a brand.

Thus, for a brand to leverage soft power, it needs to create a strong narrative derived from shared culture and values with its constituents that sit outside the hard power of marketing.

Let's explore this with the help of an example - the Michelin Guide. I borrow this from Mario's article that I mentioned earlier. André Michelin, the co-founder of the French multinational tire company Michelin, faced a peculiar problem in 1900. (emphasis mine)

André Michelin knew the problem: there weren't enough cars.

....the market was too small. There were too few cars, and those that did exist weren't driving enough. Few used their automobiles to take the kind of long journeys that would produce significant wear-and-tear and precipitate the purchase of new treads.

So André hatched a plan unusual in its far-sightedness and obliqueness: the company would launch a guidebook designed to promote travel by car. In 1900, the Michelin Guide was born.

It proved to be an extraordinarily savvy business decision. Though it began as a free resource for motorists, featuring maps and automotive information, the Michelin Guide became a defining cultural and gastronomical resource. It succeeded in encouraging touring (and thus increasing the purchase of tires) and creating a story that others began to tell themselves to tie to their values and identity. In that respect, Michelin's move is perhaps the purest example of "soft power" applied to the corporate world. Rather than winning with might or money, the manufacturer appealed with its ideas.

Michelin Guide ticks all the boxes that characterize soft power for a brand.

Michelin Guide is not the only example of brands using soft power to create a competitive advantage. Let's look at a few more examples before we unpack this further.

How to build the moat of Soft Power for a brand

So far, I have focused on what soft power is and how it works in the context of brands. The key question, however, remains - How can you build soft power for a brand?

Soft power needs two ingredients to work: (a) A narrative (b) An agent.

The importance of narrative

Soft power cannot be created without a cogent narrative. Each of the examples mentioned above has a narrative in play. For instance, Think with Google has a narrative of helping marketers know more about the customer and become better at their jobs. Stripe with Stripe Press has built a narrative of pushing forward ideas to propel innovation and new enterprise. Robinhood Snacks aims to make investment news digestible in a very short time for the new investors.

A strong narrative needs three necessary and sufficient conditions to exist:

  • Attractive: The narrative needs to have inherent attraction. A strong narrative has a sense of magnetism, optimism, and forward-looking bias.

  • Shared value: A strong narrative is built on values shared across its constituents. For instance, Google's key constituents are marketers, and Think with Google's narrative aligns with this group. Similarly, Robinhood Snacks's narrative of digestible investment news is shared with its generation Z investors who deride conventional sources of investment news like the Wall Street Journal.

  • Orthogonal to hard power's narrative: Google is an ads company, but it doesn't talk about ads in the Think with Google narrative. Similarly, Robinhood Snacks doesn't push day-trading or stock shorting as part of its narrative.

The agent

The agent takes the narrative to its constituents to create soft power. There are no formal studies on the types of agents or which agents work best. Based on my research, I believe five types of agents enable a brand to achieve soft power. Brands use a combination of these to build their soft power.

Content

Think with Google and Robinhood Snacks are great examples of content agents. These allow massive reach to the brand and sit orthogonal to the main business of these brands. Content agents also allow brands to 'shape' the narrative in the larger ecosystem, something that A16Z (a VC firm) is achieving through the launch of future.com.

Community

HEUG (Higher Education User Group) is an excellent example of how a community can provide soft power to a brand. HEUG comprises key stakeholders from the higher education space who push the charter of technology in higher education. Oracle inherited it as part of the PeopleSoft acquisition and, after an initial cold-shouldering, realized the importance of having access to an erudite and influential group of education stakeholders who can push for the adoption of technology (including Oracle's own product suite) in a lucrative customer segment.

Tools

Providing its users with tools that help them do their work better is another type of agent for a technology company. For instance, Google provided PageSpeed insights that allows developers to benchmark the performance of their web pages. The tool is free (there are paid tools in the market that do a much worse job) and sits completely outside Google's business of selling ads.

Research

Research that aligns with your company's views is another agent that has been used in the past. For instance, alcohol beverage companies fund external research that extolls the virtues of alcohol consumption, often linked to health benefits. It is pertinent to note here that the ethics of this agent have been questioned on numerous occasions in the past.

Founders

Opinionated, social media savvy, and media-friendly founders are perhaps the best agents to build soft power for a company. We have seen this in the cases of Steve Jobs, Elon Musk, and Marc Benioff and the competitive advantage they provide to their brands. Even if they are not selling their products directly, they bring an enormous halo to the brand.

Closing thoughts

  • Does every brand need soft power? No, not all brands need soft power. For instance, focusing on hard power is better if your brand is losing money and deep in Red. If you are a brand with a steady market share in a highly competitive industry, you should seriously consider building soft power as a moat.

  • Isn't all of this just content marketing? No, content marketing is about making content that sells the products made by your company. These typically include case studies, white papers, testimonials, etc. The content agent for soft power doesn't include content that seeks to sell more of your products.

  • Isn't this brand building? Yes, it is brand building. In fact, everything that you do as a business is brand building (or brand destroying). Soft power is a way to build brands without relying completely on hard power.

  • All agents you have mentioned above involve significant investment. Does this not make these hard power? No, investment is not a differentiating factor between hard and soft power. In fact, soft power needs investment (sometimes significant) before it hits a critical scale.

  • So I can stop all hard power activities and focus exclusively on soft power for my brand? No, as we have seen from the foreign policy example, hard power and soft power need to co-exist, and it is not an either-or situation. In fact, it will be extremely difficult for soft power to be a moat without the presence of hard power.

  • Does the creation of soft power take a lot of time? Yes and No. Time is a definitely crucial factor in hitting the critical scale for soft power. The narrative has to be delivered consistently through a combination of agents, and it takes time to build stickiness. However, if you are in a hurry, you can acquire an entity with existing soft power, as seen in Robinhood snacks.

That's all. I hope you enjoyed reading this post.

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Rohit

The Hypothesis is a newsletter with essays on the deep end of timeless strategic ideas. It is part of my '40 before 40' quest of writing 40 essays before I turn 40 in October 2022. To know more about me or The Hypothesis, click on the about page.

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Sources:  

  1. Whose Story Wins? by Mario Gabriele, The Generalist (link) (paywall)

  2. The year in charts: VC defies 2020 expectations despite the pandemic, Pitchbook (link)

  3. Nye, Joseph S. “Soft Power.” Foreign Policy, no. 80, 1990, pp. 153–171. JSTOR (link)

  4. Nye, J. S. (2008). Public Diplomacy and Soft Power. The ANNALS of the American Academy of Political and Social Science, 616(1), 94–109 (link)

  5. The Benefits of Soft Power, HBS Working Knowledge (link)

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