Jack Daniel’s marketing magic

December 8, 2011, 10:00 AM UTC

How the Tennessee whiskey in the square bottle, became a global megabrand without losing its small-town authenticity.

Formerly the head of Procter & Gamble’s $8 billion advertising operation, Jim Stengel — the ultimate marketing guru — is bringing a new message to the masses. In his upcoming book, Grow: How Ideals Power Growth and Profit at the World’s Greatest Companies, Stengel, in conjunction with Millward Brown Optimor and the UCLA Anderson School of Management, identifies 50 brands that outperformed the competition. In this exclusive excerpt, Stengel shows how brands with ideals (like delivering unrelentingly high-quality whiskey) are more recognizable — and profitable — in the long run.

FORTUNE — The character of Jack Daniel’s, the whiskey with the iconic black-and-white label on the equally iconic square bottle, is inextricably bound up in the distinctive character of Jack Daniel, the brand’s founder and first master distiller. A physically diminutive man only 5 feet 2 inches tall, Jack Daniel devoted his outsize personality to the ideal of making a whiskey that, thanks to charcoal filtering and other factors, he could be proud to sell and others could be proud to drink — at a premium price.

From the start, Jack Daniel grew his business through astute brand leadership. He had lots of competitors around Lynchburg, Tenn., in distilling whiskey that was filtered through charcoal. He wanted his whiskey to be, and represent, something special. So he used only the iron-free cave spring water on his property and the finest grains, mellowed his whiskey by filtering it through 10 feet of sugar maple charcoal, and changed the charcoal out more often to produce a more consistent and better whiskey. Jack liked to say, “Every day we make it, we’ll make it the best we can.”

Before his death in 1911, Jack Daniel passed his whiskey business along to his nephew Lem Motlow, who had long worked for him. Lem found a way, against the odds, to innovate by staying true to the ideal established by his uncle. He not only used the same distillation process and kept the square bottle but also resurrected Jack Daniel’s after Prohibition, which was much longer in Tennessee (1910-37) than in the U.S. as a whole (1919-33). Even after 1939, many counties in Tennessee remained dry.

After Lem Motlow died in 1947, his children increased sales with the brand’s first national advertising, and then sold the business in 1956 to family-controlled Brown-Forman as the best way to maintain heritage and quality while expanding. Under Brown-Forman’s ownership, and with the continuing involvement of Motlow family members, Jack Daniel’s has seen a series of brilliant innovations that have preserved and extended the richness of its brand experience, while never veering off its hallowed ideal.

Until the 1950s, sales of Jack Daniel’s grew almost entirely through word of mouth, boosted by occasional media attention and intermittent regional ads. In 1951, Fortune published an article on Jack Daniel’s that chronicled its growth and its appeal to such disparate figures as the 1950 Nobel Prize winner William Faulkner, British Prime Minister Winston Churchill, and Hollywood director John Huston, whose movie The African Queen was then a big hit. A similar 1954 article in True, one of the most popular magazines of its day, put even greater emphasis on its being the favorite drink of entertainment celebrities such as Frank Sinatra, Jackie Gleason, and Ava Gardner. Sinatra called Jack Daniel’s “nectar of the gods,” and he sometimes wore a blazer with a patch for an imaginary “Jack Daniel’s Country Club.”

Interestingly, Jack Daniel’s began to advertise regularly at a time demand already exceeded supply. From the mid-1950s to the 1970s the company sold its product on allocation: “The sales representatives would literally go into an establishment and let them know how many bottles or cases they could have,” explains brand historian Nelson Eddy.

Adds Eddy: “When other companies would pull back from advertising, Jack Daniel’s advertised more. Those ads carried the message ‘We’d rather ask for your patience than your forgiveness.’ They spent money on ads to tell people they couldn’t get it. What they essentially said is that like Jack Daniel and Lem Motlow before them, they’re not going to compromise the quality of the product to meet demand, so customers can be assured that when they do get some, it’s going to be the one and only Jack Daniel’s.”

The approach followed a 1955 one-page marketing plan drafted at the behest of Art Hancock, the brand’s first marketing director, and Winton Smith, its first national sales director, who envisioned a future based on the heritage that Jack Daniel and Lem Motlow defined. The one-page plan, Eddy says, “codified Jack Daniel’s as authentic, made by real people in an out-of-the-way place.” Their ads are distinctive not only for what they say but also for what they show, evoking a premium brand experience that is unique in the marketplace.

Eddy notes that “if you look at liquor ads of the period, they’re typically full-page, full-color with a big beautiful bottle shot and a man in a smoking jacket or posed by an expensive car, something that says luxury. Well, here comes this brand running smaller-space ads with black-and-white photography of these people in Lynchburg, Tenn., who aren’t in smoking jackets. They’re in the work clothes they wear every day to make the whiskey.”

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This counterintuitive approach to marketing a premium brand — the one-page marketing plan included avoiding discounting the price — ran into skeptics along the way, who did not understand the universal values it evoked. “Going into the United Kingdom in the early 1980s,” Eddy says, “there was pushback about small black-and-white ads showing people in Lynchburg, Tenn. They said, ‘That works in the United States, but it won’t work here.’ Guess what? It did.” Today Britain is the second-strongest market for Jack Daniel’s.

While this decision now looks easy and smart in retrospect, I am sure it was gut-wrenching. I worked on dozens of global brands at P&G (PG) where this discussion happened in every new country as we expanded. There is a constant tension between the ideal of the brand and the drive to make the brand more local, more in tune with country-specific habits, practices, and culture. Like other top businesses I’ve studied in depth, Jack Daniel’s has a “brand ideal” that is authentic to its heritage; enthusiasm for that ideal will likely resonate wherever a company takes its business.

When Jack Daniel’s went on allocation in the mid-1950s, the distillery began to receive letters from people asking when and where they might be able to buy Jack Daniel’s in their communities. Jack Daniel’s sales and marketing staff wrote back in a friendly way about how sorry they were to disappoint them and how much they valued their love of the whiskey. They wished they could make more, but they couldn’t because it would hurt quality.

The brand made a positive out of having to go on allocation, but it didn’t want to frustrate large numbers of customers permanently. The challenge was to increase supply of an artisan-made product and to maintain the founder’s values. In the late 1970s Brown-Forman tore down the existing distillery and built bigger facilities on the same site, while the distillery employees continued to go about their work in the open air, walking on temporary wooden catwalks built around the still.

The result immediately made its decades-old, supply-constrained business model obsolete. Jack Daniel’s grew into a global brand, almost tripling sales from 1973 to 1986. To support this growth, Jack Daniel’s invested more in its archetypal Lynchburg-focused advertising, which had continued to resonate with consumers. It also began to engage in an active way with popular culture through sponsorships. The now famous Jack Daniel’s barbecue competition dates back to the 1980s. In 1995, Jack Daniel’s became a continuing sponsor of Professional Bull Riders. This relationship fit the Jack Daniel’s persona of the maverick, authentic individual exceptionally well, because the now very successful Professional Bull Riders tour had been formed only three years earlier by 20 bull riders who split off from the Professional Rodeo Cowboys Association.

Jack Daniel’s has grown with much less product proliferation than most brands. Jack Daniel’s Old No. 7 remains by far the largest part of their global business. Guided by their ideal, Jack Daniel’s management has introduced new products over the years to keep their brand and their ideal relevant. Every new product emanates from the ideal, and most are actually derivatives of the special whiskey from Lynchburg.

In the 1980s, Jack Daniel’s introduced Gentleman Jack, a smoother, softer whiskey — thanks to being charcoal-filtered twice — and the first new whiskey from the distillery in 100 years. In 1997, Jack Daniel’s successfully introduced Single Barrel Select, the equivalent of a single-malt Scotch whiskey. The late 2000s brought two major initiatives: Jack Daniel’s Country Cocktails, a range of malt beverages, and the global expansion of a variety of ready-to-drink cocktails that contain Jack Daniel’s and cola, diet cola, or ginger ale. In 2011, Jack Daniel’s introduced Jack Daniel’s Tennessee Honey Whiskey.

Tennessee Honey is one of the boldest new initiatives from Jack Daniel’s over the past 25 years, and one of the riskiest. But if you want to dominate in any new category, you have to dominate customers’ entry into it. Jack Daniel’s has long been the dominant favorite of young people entering the whiskey category, but young whiskey drinkers’ tastes are evolving, and the flavored whiskey category is growing fast. “You need to ask, ‘How would Jack launch a flavor?’ ” recalls Kris Sirchio, Brown-Forman’s chief marketing officer.

The inspiration for the positioning came from Arnold Worldwide, Jack Daniel’s ad agency. They captured it in the phrase “A little bit of honey, a whole lot of Jack.” The product, while flavored, had to be distinctive, authentic.

As Jack Daniel’s has grown from a U.S. brand to a global one, so the Jack Daniel’s marketing team has grown from a small number of people to a global marketing organization. To ensure that employees around the world understand the brand experience from the inside, Jack Daniel’s brings them to Lynchburg in small groups for an experience it calls Camp Jack. Over several days the participants learn the legend and lore of Jack Daniel’s up close, including a day working in the distillery.

The goal of Camp Jack is to ensure that everyone who attends it can understand the absolute authenticity of the brand. Kris Sirchio tells me that one of the most special parts of Camp Jack is the bestowal of nicknames on the participants in a ceremony on Barbecue Hill, site of the annual Jack Daniel’s Invitational barbecue contest. Nicknames are a symbol of friendship, an abbreviated story, and, as it turns out, they’re part of the lore of the Jack Daniel’s brand. After all, Jack Daniel’s full and proper name was Jasper Newton Daniel, but his friends nicknamed him “Jack.” How fortunate — can you imagine Keith Richards drinking “Jasper Daniel’s”?

From the book Grow: How Ideals Power Growth and Profit at the World’s Greatest Companies Copyright © 2011 by Jim Stengel. Published by arrangement with Crown Business, a division of Random House Inc.

This article is from the December 26, 2011 issue of Fortune.