Managing Co-Branding Strategies: Global Brands into Local Markets 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 Managing Co-Branding Strategies: Global Brands into Local Markets case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Managing Co-Branding Strategies: Global Brands into Local Markets case study is a Harvard Business School (HBR) case study written by Russell Abratt, Patience Motlana. The Managing Co-Branding Strategies: Global Brands into Local Markets (referred as “Branding Brands” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Cross-cultural management.

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 Managing Co-Branding Strategies: Global Brands into Local Markets Case Study

Co-branding is an important strategy for the transition of brands. For multinational companies with global brands, it raises the chances of success in local markets. For local firms with strong brands, it secures their future through foreign investment and access to technology while maintaining consumer franchise and loyalty. In this review of co-branding and its relationship to consumer choice behavior, two case studies in the food industry lead to a set of guidelines for managers who want to use a co-branding strategy in brand transitions.

Case Authors : Russell Abratt, Patience Motlana

Topic : Sales & Marketing

Related Areas : Cross-cultural management

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Calculating Net Present Value (NPV) at 6% for Managing Co-Branding Strategies: Global Brands into Local Markets Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10014577)	-10014577	-	-
Year 1	3443513	-6571064	3443513	0.9434	3248597
Year 2	3968646	-2602418	7412159	0.89	3532081
Year 3	3968048	1365630	11380207	0.8396	3331650
Year 4	3227024	4592654	14607231	0.7921	2556105
TOTAL			14607231		12668433

The Net Present Value at 6% discount rate is 2653856

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. Net Present Value
3. Payback Period
4. Profitability Index

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

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Formula and Steps to Calculate Net Present Value (NPV) of Managing Co-Branding Strategies: Global Brands into Local Markets

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 Branding Brands 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 Branding Brands 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	(10014577)	-10014577	-	-
Year 1	3443513	-6571064	3443513	0.8696	2994359
Year 2	3968646	-2602418	7412159	0.7561	3000867
Year 3	3968048	1365630	11380207	0.6575	2609056
Year 4	3227024	4592654	14607231	0.5718	1845061
TOTAL					10449343

The Net NPV after 4 years is 434766

(10449343 - 10014577 )

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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	(10014577)	-10014577	-	-
Year 1	3443513	-6571064	3443513	0.8333	2869594
Year 2	3968646	-2602418	7412159	0.6944	2756004
Year 3	3968048	1365630	11380207	0.5787	2296324
Year 4	3227024	4592654	14607231	0.4823	1556242
TOTAL					9478165

The Net NPV after 4 years is -536412

At 20% discount rate the NPV is negative (9478165 - 10014577 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Branding Brands 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 Branding Brands has a NPV value higher than Zero then finance managers at Branding Brands 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 Branding Brands, then the stock price of the Branding Brands 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 Branding Brands 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 will be a multi year spillover effect of various taxation regulations.

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

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.

Understanding of risks involved in the project.

What can impact the cash flow of the project.

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 Managing Co-Branding Strategies: Global Brands into Local Markets

References & Further Readings

Russell Abratt, Patience Motlana (2018), "Managing Co-Branding Strategies: Global Brands into Local Markets Harvard Business Review Case Study. Published by HBR Publications.