Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics case study is a Harvard Business School (HBR) case study written by Leyland Pitt, Michael Parent, Pierre R. Berthon, Peter G. Steyn. The Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics (referred as “Ning Ambush” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, .

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics Case Study

Sponsorship of large sporting and cultural events has become a major marketing communication tool, particularly when firms obtain exclusive rights and garner the hype associated with this honor. Concomitantly, ambush marketing-defined as attempts by competitors to exploit the event-has also increased in prominence. This article outlines what is known as the Li Ning affair, whereby major Olympic sponsor Adidas was ambushed by lesser-known Chinese sportswear company Li Ning, whose namesake founder was the most decorated Chinese Olympian and who lit the Olympic flame at the 2008 Beijing Olympiad. Data collected immediately following the closing of the Beijing Games isolates what we call the Li Ning effect-or, being incorrectly identified as an official sponsor-and the positive effects this has on measures of brand attitude and recommendation likelihood. As presented herein, seven lessons about ambush marketing can be derived from the Li Ning affair, which sponsors and those considering sponsorship opportunity might wish to learn.

Case Authors : Leyland Pitt, Michael Parent, Pierre R. Berthon, Peter G. Steyn

Topic : Sales & Marketing

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10012098)	-10012098	-	-
Year 1	3444735	-6567363	3444735	0.9434	3249750
Year 2	3968816	-2598547	7413551	0.89	3532232
Year 3	3968962	1370415	11382513	0.8396	3332417
Year 4	3240214	4610629	14622727	0.7921	2566553
TOTAL			14622727		12680952

The Net Present Value at 6% discount rate is 2668854

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Internal Rate of Return
2. Payback Period
3. Profitability Index
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Ning Ambush shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Ning Ambush have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Sales & Marketing Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Ning Ambush often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Ning Ambush needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10012098)	-10012098	-	-
Year 1	3444735	-6567363	3444735	0.8696	2995422
Year 2	3968816	-2598547	7413551	0.7561	3000995
Year 3	3968962	1370415	11382513	0.6575	2609657
Year 4	3240214	4610629	14622727	0.5718	1852603
TOTAL					10458677

The Net NPV after 4 years is 446579

(10458677 - 10012098 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10012098)	-10012098	-	-
Year 1	3444735	-6567363	3444735	0.8333	2870613
Year 2	3968816	-2598547	7413551	0.6944	2756122
Year 3	3968962	1370415	11382513	0.5787	2296853
Year 4	3240214	4610629	14622727	0.4823	1562603
TOTAL					9486191

The Net NPV after 4 years is -525907

At 20% discount rate the NPV is negative (9486191 - 10012098 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ning Ambush to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Ning Ambush has a NPV value higher than Zero then finance managers at Ning Ambush can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Ning Ambush, then the stock price of the Ning Ambush should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Ning Ambush should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What can impact the cash flow of the project.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics

References & Further Readings

Leyland Pitt, Michael Parent, Pierre R. Berthon, Peter G. Steyn (2018), "Event Sponsorship and Ambush Marketing: Lessons from the Beijing Olympics Harvard Business Review Case Study. Published by HBR Publications.