Behavioral Drivers of Brand Equity - Head & Shoulders in India 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 Behavioral Drivers of Brand Equity - Head & Shoulders in India case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Behavioral Drivers of Brand Equity - Head & Shoulders in India case study is a Harvard Business School (HBR) case study written by Loveneet Tyagi, S. Ramesh Kumar. The Behavioral Drivers of Brand Equity - Head & Shoulders in India (referred as “Brand Shoulders” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customers, Emerging markets, Market research.

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 Behavioral Drivers of Brand Equity - Head & Shoulders in India Case Study

"What are the nuances that link brand positioning, brand associations and brand equity related aspects of a brand performing successfully in the market?" especially in an emerging market such as India is a question that triggers many approaches among academics and practitioners. Head &Shoulders brand from Procter and Gamble is a multinational brand that had grown rapidly in the Indian context after displacing a well-entrenched brand of shampoo. The brand's effective positioning had struck a chord with consumers and had sustained its success over a period of time. With several competitive brands entering the well-advertised category of shampoos, the brand manager for Head &Shoulders felt that its positioning though effective cannot last forever and wanted to find out if the brand's positioning could be strengthened. Besides the analysis of thr regular brand positioning strategies, the company felt that a study on consumer behavior could provide useful pointers to the alternatives of brand positioning with respect to Head &Shoulders when studied with its competitive brands. The results of the study provided interesting but challenging results that made brand repositioning more complex than what the brand manager had assessed. The case study highlights the importance of consumer behavior when brands decide to reposition themselves in a dynamic environment. Furthermore, the case also draws on the implications of brand positioning and consumer behavior on the qualitative dimensions of brand equity.

Case Authors : Loveneet Tyagi, S. Ramesh Kumar

Topic : Sales & Marketing

Related Areas : Customers, Emerging markets, Market research

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Calculating Net Present Value (NPV) at 6% for Behavioral Drivers of Brand Equity - Head & Shoulders in India Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10024024)	-10024024	-	-
Year 1	3450024	-6574000	3450024	0.9434	3254740
Year 2	3959143	-2614857	7409167	0.89	3523623
Year 3	3945533	1330676	11354700	0.8396	3312746
Year 4	3240007	4570683	14594707	0.7921	2566389
TOTAL			14594707		12657497

The Net Present Value at 6% discount rate is 2633473

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

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 Brand Shoulders 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. Brand Shoulders 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 Behavioral Drivers of Brand Equity - Head & Shoulders in India

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 Brand Shoulders 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 Brand Shoulders 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	(10024024)	-10024024	-	-
Year 1	3450024	-6574000	3450024	0.8696	3000021
Year 2	3959143	-2614857	7409167	0.7561	2993681
Year 3	3945533	1330676	11354700	0.6575	2594252
Year 4	3240007	4570683	14594707	0.5718	1852485
TOTAL					10440438

The Net NPV after 4 years is 416414

(10440438 - 10024024 )

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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	(10024024)	-10024024	-	-
Year 1	3450024	-6574000	3450024	0.8333	2875020
Year 2	3959143	-2614857	7409167	0.6944	2749405
Year 3	3945533	1330676	11354700	0.5787	2283295
Year 4	3240007	4570683	14594707	0.4823	1562503
TOTAL					9470223

The Net NPV after 4 years is -553801

At 20% discount rate the NPV is negative (9470223 - 10024024 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Brand Shoulders 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 Brand Shoulders has a NPV value higher than Zero then finance managers at Brand Shoulders 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 Brand Shoulders, then the stock price of the Brand Shoulders 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 Brand Shoulders 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.

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.

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 Behavioral Drivers of Brand Equity - Head & Shoulders in India

References & Further Readings

Loveneet Tyagi, S. Ramesh Kumar (2018), "Behavioral Drivers of Brand Equity - Head & Shoulders in India Harvard Business Review Case Study. Published by HBR Publications.