Is advertising for losers? An empirical study from a value creation and value capturing perspective

Does advertising lead to higher profits? This question has preoccupied company executives and academic researchers for many decades. Arguments have been put forth in both directions, and evidence is mixed at best. In this article, we re-examine the question from a value creation and value capturing perspective, which allows us to re-interpret and reconcile the different views and empirically validate the resulting hypotheses. Using a database of the top 500 brands of established companies during the 2008–2015 period, we find that advertising spending has no significant impact on profitability, while both brand value and research and development (R&D) spending have a clearly positive effect. In addition, we observe a positive interaction effect between advertising spending and R&D spending and a negative interaction between brand value and R&D spending on profitability. These findings corroborate the view that advertising in and of itself does not improve profitability; rather, its effect is positive only when it acts in support of customer value creation as a result of R&D.     

ADVERTISING AND VALUE MAXIMIZATION: AN INTEGRATIVE APPROACH *

The model developed in this paper is interdisciplinary in that we incorporate the advertising decision into the capital asset pricing model (CAPM) for valuation of risky income streams. The advertising decision involves the purchase of media services whose effects on sales (profit) are hypothesized to vary with general economic activity. As in any asset expansion, the firm purchases an income distribution with a given expected value and covariance with the economy. By consulting the CAPM, we are able to obtain a value for the income distribution associated with the advertising expenditure. By failing to account for both risk and return, those previous studies which have examined the effect of advertising on profit or valuation are, at best, incomplete. We are able to demonstrate the inappropriateness of ranking alternative advertising strategies solely on the basis of expected income.     

R&D与广告对中日家电企业技术效率影响的比较研究

基于DEA和SFA模型,本文首先分析了2001-2005年间中日两国家电上市企业的市场势力效率和盈利效率这两类技术效率;其次,在构造DEA-TOBIT和Battese&Coelli(1995)SFA这两个计量模型的基础上,进一步研究了企业R&D与广告宣传这两种市场竞争策略对这两类技术效率的当期和累计影响效果。结果显示,非参数估计DEA和参数估计SFA这两个方法在中日家电企业技术效率评价方面取得了较为一致的结果;同时,所构造的DEA-TOBIT和SFA这两个计量模型也显示了在竞争性家电制造业中,R&D对企业市场势力效率和盈利效率的累积影响效果均为积极显著,但却未能证实长期内广告宣传对这两类技术效率的积极效果。     

Evidence of Managerial Short-termism in the UK

This paper considers an aspect of possible managerial short-termism in the UK. It discusses some potential motivations for that phenomenon and presents evidence which suggests that short-termism exists and is positively associated with managerial perceptions of capital market valuation practices. Two hypotheses were developed and tested using the responses concerning R&D expenditure obtained from a postal questionnaire sent to the finance directors of theTimes 1000companies. These were that many top managers in UK quoted companies behave in a ‘short-termist’ manner; and that the extent to which managers behave as hypothesized above is positively associated with their perceptions of the level of emphasis placed by the capital market on measurements related to short-term reported earnings. The results obtained support the hypotheses. Overall, the evidence of the paper is consistent with the view that many finance directors of large UK companies are short-termist in their perceptions and that such short-termism is positively associated with their beliefs about the level of emphasis placed by the capital market on figures of reported earnings.     

考虑参考减排努力水平效应的联合减排与竞争动态策略研究

考虑到参考减排努力水平效应，构建了一个包括两个竞争的中小低碳代工制造商和一个品牌商的供应链，借助微分博弈理论研究了联合减排和广告的动态策略以及供应链协调问题。先后分析了供应链在分散决策和合作决策中的均衡策略，比较了两种决策模式下减排努力水平、广告水平以及供应链总利润现值的差别，发现制造商边际收益较低时，在合作决策中减排努力水平更高，否则在分散决策中减排水平更高；品牌商在合作与分散决策中广告水平的高低不取决于品牌商的边际收益而取决于制造商边际收益的相对高低，合作价值是品牌商边际收益的减函数，借助数值模拟分析了记忆效应和参考效应参数对供应链总利润现值的影响。通过设计低碳代工制造商和品牌商之间相互分担对方的减排成本和广告成本的契约，实现了供应链协调，达到了在合作决策时的总利润，并比较了竞争的减排代工制造商和品牌商在分散决策和双向成本分担契约中的利润现值差异，数值分析发现简单的双向成本契约并不能实现帕累托改进，本文提供了转移支付的思路以实现契约自执行性。     

IMPLICATIONS OF A MODAL-DELAYED DISTRIBUTED LAG RESPONSE TO ADVERTISING EXPENDITURE*

This paper reviews a generalized optimal theoretic advertising model with the flexibility to account for a modal-delayed (inverted V), distributed lag response to advertising expenditure. Three econometric techniques are used in a general test of this model. Conclusions show that models constrained to a simple exponential lag overspecify the optimal level of advertising.     

The Contingent-Claims Approach to Investment Decisions*

This paper presents a contingent-claims approach to project valuation when capital expenditures are made sequentially over time. It focuses on an important facet of sequential investment projects that the firm can undertake—or pass up projects—as more information becomes available. The contingent-claims approach takes account of this important feature of firms' investment decision process, whereas the traditional capital budgeting procedure does not. Since the traditional method does not reflect the options nature of investment opportunities, it underestimates the value of sequential investment projects. As a result, a naive implementation of the traditional capital budgeting procedure could result in rejecting profitable projects. The extent of undervaluation associated with the traditional capital budgeting procedure is greater when the correlation between the random component of the future asset value and that of the required capital expenditure is smaller and/or when the growth rate of the required capital expenditure is higher.     

Pensionsverpflichtungen: Ansammlungs- und Gleichverteilungsverfahren und die Prognose von Residualgewinnen

Assuming an infinite forecast horizon, residual earnings valuations provide in theory identical results independent of the accounting methods used. In practice however there is used a detailed planning period, covering a few years, after which simple growth models are applied. How suitable residual earnings are for the use in such a simple growth model, is substantially dependent on the nature of the accounting. Thereby the accounting obtains an impact on the valuation and accordingly on the length of the detailed planning period, necessary for an accurate valuation. In this paper these contexts are analyzed using the example of pension obligations. The amount of the pension obligations and the resulting residual earnings are substantially affected by the distribution method used. Concerning the two most important distribution methods, the projected unit credit and the projected benefit valuation method, it is analyzed in which way these methods respond to changes of the value structure-i. e. a modification of the amount of the pension-and to changes of the quantity structure-i. e. a modification of the number of employees within the pension plan. In particular it is examined which period of time both methods need-after a surprising change of the value or quantity structure-to generate residual earnings, which allow a valuation of the pension obligations with a simple growth model.     

A Two-Period Repeated Game Advertising Investment Model for Oligopolistic Markets with an Application to the Beer Industry*

This paper proposes a simple analytical model of advertising competition in oligopoly markets. The widely used log-log sales response function underlies the model specification. Advertising carryover effects are assumed to persist for one period following the period in which the expenditure occurs. Firms are assumed to be engaged in a repeated competitive game in which in every period advertising levels are set such that they maximize current and next period (i.e., two-period) profits. A Nash equilibrium solution is sought for the game. Compared with previous empirical studies of advertising competition in a game theoretic framework, the proposed model offers the following advantages: (1) oligopoly, not duopoly, markets are analyzed; (2) industry sales is allowed to vary over time as a function of advertising expenditures; (3) non-zero discount rates are used for the players. An empirical application is provided using data from the beer market on sales and advertising expenditures of Anheuser-Busch and Miller Brewing. Comparisons are provided with policies that ignore the dependence of next period profits on current advertising levels, reaction function strategies and spending levels obtained from a market share game. Extension of the model formulation to multiple marketing instruments is briefly discussed.     

Advertising: Trends and prospects

The advertising industry in the U.K. has for many years been regarded as a dynamic and growing industry. This paper examines the proposition and details the historical growth of the advertising industry during post war years and outlines structure through which that growth occurred. Furthermore, the author examines the structure of advertising expenditure both in terms of supply (that is the types of media utilized) and the demand (that is the types of commercial or industrial activity).

The author details surprising facts about the level of business at which the advertising industry is currently operating and examines the causes for the trends he discerns. As the Managing Director of an advertising agency formed in 1974 the author is both a qualified and deeply concerned writer.     

基于互联网环境下的企业网络广告投资策略研究

随着网络广告的日益普及,选择投放合适的网络广告已经成为决定广告投放成功的关键,企业在进行网络广告投资决策时,面临着选择投资门户网络广告和长尾网络广告的困境。然而,目前并没有针对投放门户网络广告和长尾网络广告的理论和方法,因此需要投放门户网络广告和长尾网络广告的理论、方法和模型以有效指导企业广告投放的运作管理,为企业创造更高的价值。本文引进柯布-道格拉斯销售函数 S（a,q）=α-βa^-γq^-δ,尝试应用博弈论方法构建基于门户网络广告和长尾网络广告的非合作静态Nash投资模型、合作静态Nash投资模型和Stackelberg主从博弈投资决策模型,并通过模型均衡分析求出广告的投资小收益大的条件。与非合作的纳什均衡情况相比,Stackelberg主从博弈模型中,优先投资的网络广告投资小收益大,次后投资的网络广告投资大收益小。但总的投资和收益关系不确定。同其他三种投资情况相比,基于合作的投资策略比非合作和Stackelberg先后投资策略所获得的收益要大。同时,文中运用一个数值算例进一步验证了结论的有效性。解决了企业面临投资门户网络广告和长尾网络广告决策的困境,研究结论为企业投资网络广告提供理论依据和决策方法。     

Workforce localization in the Kingdom of Saudi Arabia: issues and challenges

Despite some progress, the issue of equality at work remains more of an aspiration than achievement for organizations in developed economies across the world. In the UK, the debate on equality at work has been rekindled with a Labour government taking office, in 1997, with a commitment to equality generally and for women specifically. Fuelling the debate is the notion of managing diversity, which has emanated from the USA in recent years. This article seeks to explore the current nature of equality at work in the UK and gauge if managing diversity is in any way manifest in current organizational approaches to equality management. The exploration is rooted in four case-study organizations and is conducted through the lens of key organizational stakeholders. Beyond exposing the contemporary nature of equality at work in the case-study organizations, the empirical work allows the issues involved in the implementation of managing diversity in the UK context to be signalled.     

The Internet and the Deconstruction of the Integrated Banking Model

The rapid development of information and communication technologies (ICTs), with the Internet being one of the most significant, is shaking the foundation of the banking industry. Simply deploying the Internet as a more efficient distribution channel will not bring sustainable strategic advantages. To compete effectively, banks may need to embrace a new set of strategic priorities, based on the 'unbundling' of banking services and processes, and the 'deconstruction' of the integrated banking model. Such a radical transformation threatens the profitability and survival of some existing incumbent banks, and at the same time, it brings a cohort of new opportunities and powerful new players to the market. This paper reviews existing studies on the use of the Internet in banking, and highlights two prevailing models and the strategic thinking behind them. Based upon recent empirical evidence gathered from in-depth case studies and other information sources in the UK, the paper discusses a number of emerging tendencies and explores possibilities to reconcile the discrepancies between the two prevailing models. The paper calls for a radical departure from existing strategies in the banking industry based on the concept of process integration and service bundling. A new framework is outlined for banks and other financial organizations in developing and evaluating their strategies. The latest evidence suggests that at least eight models of Internet banking, somewhere on the spectrum between the two prevailing models highlighted by previous studies, have emerged in the UK. These models are illustrated briefly in the paper. This is still a rapidly evolving area, and new research is clearly needed to understand the key dynamics of the banking industry in the networked economy. Finally, some themes for further research are highlighted.     

An Exploratory Study of the Managerial Implications of Valuing Brands

This paper reports the results of interdisciplinary research extending the work of Mather and Peasnell (1991) reported in an earlier issue of this journal. Mather and Peasnell conducted an empirical analysis of the economic circumstances surrounding decisions to capitalize brands. This study investigates the managerial implications of periodically assessing and capitalizing the value of brands. Exploratory interviews were conducted with the key players in brand valuation activity, namely marketing and finance officials in brand-valuing companies and two senior personnel in the leading international brand-valuing agency. The recent inception of brand valuation in the accounts of several strong branded British companies provides an excellent research opportunity to explore a relatively novel managerial activity and its internal implications. These implications are reviewed under the headings: planning and control, the accounting/marketing interface, authorization of brand-related expenditure and brand-related decision making. An important finding of the study is that, while the original impetus for brand valuation came from balance sheet considerations, other unforseen managerial advantages are now widely perceived to accrue from brand valuation. The majority of current brand valuation activity appears to be driven more by management information needs, which are served by the evaluation phase of the exercise, than by a desire to capitalize brands in the published statements.     

Advertising and the Dynamics of Market Structure: The UK Car Industry, 1958–1983*

This paper looks at the effect of advertising on market share dynamics, developing a model that describes the mechanism by which advertising affects consumer choice and illustrating it with reference to the UK car market. Advertising shares are observed to be highly positively correlated with market shares, suggesting that advertising has both pro- and anti-competitive effects. Advertising facilitates entry in as far as entrants can acquire market share through advertising, but it inhibits entry when an escalation in total industry advertising makes this acquisition prohibitively costly.     

Dynamic programming for spatial allocation of advertising expenditure

The paper deals with optimal allocation of a given amount of advertising expenditure among various sales districts. It applies dynamic programming to arrive at the optimal policy regarding such allocation. The basic model is that of Zentler and Ryde which heretofore has been solved using a graphical method. The optimal solution is illustrated with an example.     

动态市场竞争环境下电子商务企业盈利能力的影响因素研究

为找到电子商务企业高投入、低投资回报现象存在的原因,本文首先运用数据包络分析（DEA）模型计算了电子商务企业投入对产出的过度效应,即投入拥挤,然后将之与行业内的市场竞争程度和移动电子商务的发展相结合,通过构建面板数据回归模型,详细探讨了动态市场竞争环境下电子商务企业盈利能力的影响因素。研究结果证实了资产规模过大对传统电子商务企业盈利能力具有削弱作用,而市场集中度和移动电子商务的发展则对传统电子商务企业盈利能力具有推动作用。这些发现启示企业经营管理者应聚焦于移动电子商务发展带来的新机遇,消除投入拥挤,通过调适生产规模和新业务模式的创新,开辟新的营销渠道和盈利模式。     

The newsvendor problem with advertising: an overview with extensions

The effect of advertising on sales has been the subject of recent studies as an important aspect in many demand-based problems. Herein, we deal with the newsvendor problem, due to its simple structure, as a suitable tool for illustrating how facets of marketing may affect decision-making concerning operational problems. In the setting presented, the newsvendor is faced with advertising-sensitive stochastic demand, where a demand-related random element comprises an advertising decision of the multiplicative or additive form. We assume that a suitable advertising strategy results in increased sales. Two advertising response functions are considered, these being concave downward and S-shaped. We review and extend the existing results relating to the newsvendor problem with marketing effects, which mostly pertain to the concave function. These are generalized by defining the S-shaped function, and some original insights into the effect of advertising are given. We establish that the optimal advertising expenditure for the multiplicative case is always less than or equal to the optimal amount in the equivalent deterministic model while it is always equal in the additive case. We finally illustrate the results that are obtained by providing numerical examples involving various advertising response functions, as well as management-related interpretations.     

Profitability of loyalty reward programs: An analytical investigation

Loyalty programs, as a prevalent CRM strategy, aim to enhance customers’ loyalty and thereby increase a firm’s long-term profitability. Recent analytical and empirical studies demonstrate inconsistent findings on the efficacy of loyalty programs in fulfilling these goals. In this study, an analytical model is developed to analyze the effect of customers’ valuation and their post-purchase satisfaction level on a loyalty program’s profitability. The results reveal how customers’ satisfaction plays a significant role in profitability of loyalty programs. We consider a profit-maximizing firm selling a good or service through two periods. Valuation is modeled as a deterministic parameter, as well as a stochastic variable with two arbitrary distributions. Depending on the customers’ valuation distribution, the model results in either a linear or a nonlinear optimization problem. Optimization problems are solved analytically, in terms of the model parameters. The obtained solutions provide some useful insights into the effects of customers’ satisfaction on the profitability of loyalty programs. Specifically, it is shown that depending on the customers’ satisfaction level, it may be optimal not to offer a loyalty reward.     

Explicit versus Implicit Profit Sharing and the Determination of Wages:

ABSTRACT: This paper considers the claim that explicit profit sharing reduces the marginal cost of labour This is contrasted with the view that implicit profit sharing occurs through wage bargaining Using a microeconomic data set from the UK we find no evidence that the introduction of profit sharing reduces base wages and hence the marginal cost of labour However firm profitability is found to have a positive effect on wages which supports the hypothesis of implicit profit sharing through wage bargaining These findings suggest that it is hard to justify the favourable tax treatment of profit related pay found in the UK