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EFFECTS OF PROMOTION IN MARKETING
EVALUATION OF AN ENTERPRISE
ABSTRACT
There exists a significant relationship
between an enterprise’s advertising/promotion spending and its contemporaneous
financial significance and evaluation. Academic studies have indicated that
about 90% of Small Medium Enterprises’ (SME`s) development is hampered by their
limited financial resources, which, in relation to this study extends to
failure to engage in the rather expensive and sometimes overlooked practice of
advertising.
The purpose of the study was to thus
examine the overall nature of advertising and the effects it has on the growth
and development of SMEs and in particular its sales volume. Objectively, the
study investigated the functions of West African Bottling Industries with focus narrowed downto
operation at the COCA COLA COMPANY NIGERIA marketing department. It sought to
inquire as to the different strategies the company employs to market its
products, and identify the economic impacts that advertising generates as a
whole.
The research design that was used in
the study was cross-sectional design. The sampling techniques were both cluster
and simple random sampling. The population was of 180 respondents and having a
sample size of 60 respondents. The sample frame was of 3 clusters targeting the
major department at COCA COLA COMPANY NIGERIA. The study used mainly primary
data assembled from interviews, questionnaires and surveys. Secondary data was
derived from previous researched literatures and books.
CHAPTER ONE
1.0.
Introduction
Enterprise valuation (EV), Total
enterprise value (TEV), or Firm value (FV) is an economic measure reflecting
the market value of a whole business. It is a sum of claims of all claimants:
creditors (secured and unsecured) and equityholders (preferred and common).
Enterprise value is one of the fundamental metrics used in business valuation,
financial modeling, accounting, portfolio analysis, etc.
Promotion is one of the market mix
elements or features, and a term used frequently in marketing. The marketing
mix includes the four P's: price, product, promotion, and place.
EV is more comprehensive than market
capitalization (market cap), which only includes common equity.
Small and medium enterprises (SMEs) are
generally thought to play a crucial role in driving economic growth in both
developing and developed countries (Beck, Kunt and Ross, 2003). Thus, it
remains unequivocally crucial to understand the categories of contribution of
small businesses at a local level and its impact on overall economic growth.
Nigeria a developing nation for instance, still has a poor statistical base of
the small businesses but there can be little doubt about the relative
significance these small enterprises have towards its economy.
1.1.
Background
Information
1.1.1.
Promotion
Promotion refers to raising customer
awareness of a product or brand, generating sales, and creating brand loyalty.
Promotion is also found in the specification of five promotional mix or
promotional plan. These elements are personal selling, advertising, sales
promotion, direct marketing, and publicity.[2] A promotional mix specifies how
much attention to pay to each of the five subcategories, and how much money to
budget for each. A promotional plan can have a wide range of objectives,
including: sales increases, new product acceptance, creation of brand equity,
positioning, competitive retaliations, or creation of a corporate image.
Fundamentally, there are three basic objectives of promotion. These are:
·
To present information to consumers as well as others.
·
To increase demand.
·
To differentiate a product.
There are different ways to promote a
product in different areas of media. Promoters use internet advertisement,
special events, endorsements, and newspapers to advertise their product. Many
times with the purchase of a product there is an incentive like discounts
(i.e., coupons), free items, or a contest. This method is used to increase the
sales of a given product.
The term "promotion" is
usually an "in" expression used internally by the marketing company,
but not normally to the public or the market - phrases like "special
offer" are more common. An example of a fully integrated, long-term, and a
large-scale promotion are My Coke Rewards and Pepsi Stuff. The UK version of My
Coke Rewards is Coke Zone.
Promotions are also held in physical
environments at special events such as concerts, festivals, trade shows, and in
the field such as in grocery or department stores. Interactions in the field
(i.e., grocery and department stores), allow customers to purchase the brand or
product immediately. The interactions among the brand and the customer are
performed by brand ambassadors [4] or promotional models[5] that represent the
products and brands in physical environments. Brand ambassadors or promotional
models are hired by marketing companies that are hired by the brand to
represent the product and/or service. Person-to-person interaction, as opposed
to media-to-person involvement, establishes connections that add another
dimension to promotion. Building a community through promoting goods and
services can lead to brand loyalty.
Promotional activities to push a brand
enabling social media channels to spread content making something viral such as
the advertising by Coke[6] using the release of a new bond film creating a huge
amount of attention which then gets promoted across all social channels by
people spreading the information due to excitement. Social media, as a modern
marketing tool, offers opportunities to reach larger audiences in an
interactive way. These interactions allow for conversation rather than simply
educating the customer. Facebook, Twitter, LinkedIn, Pinterest, Google Plus,
Tumblr and Instagram are rated as some of the most popular social networking
sites.[7] As a participatory media cultures, social media platforms or social
networking sites are forms of mass communication that through media
technologies allow large amounts of product and distribution of content to
reach the largest audience possible.[8] However, there are downsides to virtual
promotions as servers, systems, and websites may crash, fail, or become
overloaded.[9] With promotion through participatory media, there is an
opportunity to gain social capital.[10]
Promotion can be done by different
media, namely print media which includes Newspaper and magazines, Electronic
media which includes radio and television, Digital media which includes
internet, social networking and social media sites and lastly outdoor media
which includes banner ads, OOH (out of home). Digital media is a modern way of
brands interacting with consumers as it releases news, information and
advertising from the technological limits of print and broadcast
infrastructures.[11] Mass communication has lead to modern marketing strategies
to continue focusing on brand awareness, large distributions and heavy
promotions.[12] The fast-paced environment of digital media presents new
methods for promotion to utilize new tools now available through technology.
With the rise of technological advances, promotions can be done outside of
local contexts and cross geographic borders to reach a greater number of
potential consumers. The goal of a promotion is then to reach the most people
possible in a time efficient and a cost efficient manner.
1.1.2.
Enterprise Valuation
The enterprise value – or EV for short
– is an indicator of how the market attributes value to a firm as a whole.
Enterprise value is a term coined by analysts to discuss the aggregate value of
a company as an enterprise rather than just focusing on its current market
capitalization. It measures how much you need to fork out to buy an entire
public company. When sizing up a company, investors get a clearer picture of
real value with EV than with market capitalization.
Why doesn’t market capitalization
properly represent a firm’s value? It leaves a lot of important factors out,
such as a company’s debt on the one hand and its cash reserves on the other.
Enterprise value is basically a modification of market cap, as it incorporates
debt and cash for determining a company’s valuation.
1.1.3.
EV EQUATION
Enterprise value =
common equity at market value (this
line item is also known as "market cap")
+ debt at market value (here debt
refers to interest-bearing liabilities, both long-term and short-term)
+ minority interest at market value, if
any[2]
+ preferred equity at market value
+ unfunded pension liabilities and
other debt-deemed provisions
- cash and cash equivalents
- "extra assets", assets not
required to run the business
- investments in associated companies
at market value, if any
1.1.4.
Comments on basic EV equation
·
All the components particularly relevant in liquidation
analysis, since using absolute priority in a bankruptcy all securities senior
to the equity have par claims. Generally, also, debt is less liquid than equity
so that the "market price" may be significantly different from the
price at which an entire debt issue could be purchased in the market. In
valuing equities, this approach is more conservative.
·
Cash is subtracted because when it is paid out as a dividend
after purchase, it reduces the net cost to a potential purchaser. Therefore,
the business would cost that much less to start with. The same effect is
accomplished when the cash is used to pay down debt.
·
Value of minority interest is added because it reflects the
claim on assets consolidated into the firm in question.
·
Value of associate companies is subtracted because it
reflects the claim on assets consolidated into other firms.
·
EV should also include such special components as unfunded
pension liabilities, employee stock option, environmental provisions,
abandonment provisions, and so on, for they also reflect claims on the
company's assets.
1.1.5.
Intuitive Understanding of Enterprise Value
·
A simplified way to understand the EV concept is to envision
purchasing an entire business. If you settle with all the security holders, you
pay EV.
·
Counter-intuitively, increases or decreases in enterprise
value do not necessarily correspond to "value creation" or value
destruction". Any acquisition of assets (whether paid for in cash or
through share issues) will increase EV, whether or not those assets are
productive. Similarly, reductions in capital intensity (for example by reducing
working capital) will reduce EV.
·
EV can be negative if the company, for example, holds
abnormally high amounts of cash.[3]
1.1.6.
Usage
·
Because EV is a capital structure-neutral metric, it is
useful when comparing companies with diverse capital structures. Price/earnings
ratios, for example, will be significantly more volatile in companies that are
highly leveraged.
·
Stock market investors use EV/EBITDA to compare returns
between equivalent companies on a risk-adjusted basis. They can then
superimpose their own choice of debt levels. In practice, equity investors may
have difficulty accurately assessing EV if they do not have access to the market
quotations of the company debt. It is not sufficient to substitute the book
value of the debt because a) the market interest rates may have changed, and b)
the market's perception of the risk of the loan may have changed since the debt
was issued. Remember, the point of EV is to neutralize the different risks, and
costs of different capital structures.
·
Buyers of controlling interests in a business use EV to
compare returns between businesses, as above. They also use the EV valuation
(or a debt free cash free valuation) to determine how much to pay for the whole
entity (not just the equity). They may want to change the capital structure
once in control.
1.1.7.
Technical considerations
1)
Data availability:
Unlike market capitalization, where
both the market price and the outstanding number of shares in issue are readily
available and easy to find, it is virtually impossible to calculate an EV
without making a number of adjustments to published data, including often
subjective estimations of value:
The vast majority of corporate debt is
not publicly traded. Most corporate debt is in the form of bank financing,
finance leases and other forms of debt for which there is no market price.
Associates and minority interests are
stated at historical book values in the accounts, which may be very different
from their market values.
Unfunded pension liabilities rely on a
variety of actuarial assumptions and represent an estimate of the outstanding
liability, not a true “market” value.
Public data for certain key inputs of
EV, such as cash balances, debt levels and provisions are only published
infrequently (often only once a year in the annual report & accounts of the
company).
Published accounts are only disclosed
weeks or months after the year-end date, meaning that the information disclosed
is already out of date.
In practice, EV calculations rely on
reasonable estimates of the market value of these components. For example, in
many professional valuations:
Unfunded pension liabilities are valued
at face value as set out in notes to the latest available accounts.
Debt that is not publicly traded is
usually taken at face value, unless the company is highly geared (in which case
a more sophisticated analysis is required).
Associates & minority interests are
usually valued either at book value or as a multiple of their earnings.
2)
Avoiding temporal mismatches
When using valuation multiples such as
EV/EBITDA and EV/EBIT, the numerator should correspond to the denominator. The
EV should, therefore, correspond to the market value of the assets that were
used to generate the profits in question, excluding assets acquired (and
including assets disposed) during a different financial reporting period. This
requires restating EV for any mergers and acquisitions (whether paid in cash or
equity), significant capital investments or significant changes in working
capital occurring after or during the reporting period being examined. Ideally,
multiples should be calculated using the market value of the weighted average
capital employed of the company during the comparable financial period.
When calculating multiples over
different time periods (e.g. historic multiples vs forward multiples), EV
should be adjusted to reflect the weighted average invested capital of the
company in each period.
1.1.8.
Nigerian SME’s and Promotions
SMEs in Nigeria have been described as
efficient and prolific job creators and the seeds of big businesses; their
increased development accelerates the achievement of wider economic and
socio-economic objectives such as poverty alleviation. Notwithstanding the
recognition of the potential roles the SMEs play, there exist a number of
bottlenecks that affect their ability to realize their full potential.
Observations have shown that there is a rapid turn-over of enterprises in Nigeria
to an extent that for every 100 new enterprises starting in a year; 60 close
down within the year and that of those that survive (40%) are more than two
years old and 66% less than six years old (Nigeria 1998, 1999). Lack of
managerial skills, equipment and technology, regulatory issues, access to
international markets,
unfair competitiveness, etc are all
factors that hamper their development but most distinctively financial
constraints (Anheier and Seibel, 1987). The role of finance has been viewed as
a critical element for the development of SMEs. This issue stems from the
initial capital which in most likely cases is sourced from informal savings and
loan associations which are unpredictable; to broader financial obstacles that
extend to efficient and effective marketing.
As will be evident in this study, SMEs
require marketing initiatives for their sustainability and growth in the
ever-growing and competitive business environment. In particular, the question
and relevance of advertising, an element of promotion will garner more
examination.
1.2.
Problem statement and
Contributions
Advertising, as is evident from
research- is an expensive endeavor in any SME. Be it internal or via external
freelance contracting agencies. The advertising budget of any SME is as less as
2% of their quarterly turnover (Steve McKee, 2010: Bloomberg Business week).
The question that begs answers is, so how can these enterprises embrace these
financial constraints and in particular, West African Packaging Industries (COKA
COLA COMPANY NIGERIA) and rise through into development? This study seeks to
define and answer similar questions and more precisely how much the performance
and survival of SMEs is affected by advertising or lack of it.
1.3.
Research Questions
I. How does advertising impact the
growth and development of SMEs in Nigeria?
II. If advertising has any impacts on
the development of SME’s, does it influence the sales volume of the enterprises
and their entry into new markets?
III. What advertising strategy has COCA
COLA COMPANY NIGERIA adopted in promoting its products, and how effective has
it been?
1.4.
Research Hypothesis
H1: Promotion in marketing evaluation
has a positive effect on enterprises
H2: Promotion in marketing evaluation
has a negative effect on enterprises
1.5.
Objectives of the study
The main objective of this study is to
examine the effects that advertising has on the growth and development of Small
medium enterprises. The study will also seek to study the nature of advertising
and the pre-assumed relationship between advertising and sales volume that
render growth of an enterprise and additionally, the effects that advertising
has on new SMEs entrants.
1.6.
Limitations and scope of the study
As the study proves, placing cause and
effect of Advertising on the development and growth of an enterprise is very
difficult because it is not always easy to control the various factors that are
regarded as ‘contributors’ in an advertising environment. In other words, an
enterprise’s increased sales cannot solely be attributed to a particular
advertising campaign because other unrecognizable factors such as higher income
for the enterprises target customers and improved customer relations all form
contributory effects. The study thus focused only on the recognizable issues
that were attributed to advertising and were of clear relevance
in either the development or hindrance
of the development and growth of SMEs. In retrospect, these were: financial
constraints and competition.
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