As A Marketing Manager For One Of The World's Largest Automa

As A Marketing Manager For One Of The Worlds Largest Automakers You

As a marketing manager for one of the world’s largest automakers, you are responsible for the advertising campaign for a new energy-efficient sports utility vehicle. Your support team has prepared the following table, which summarizes the (year-end) profitability, estimated number of vehicles sold, and average estimated selling price for alternative levels of advertising. The accounting department projects that the best alternative use for the funds used in the advertising campaign is an investment returning 10 percent. In light of the staggering cost of advertising (which accounts for the lower projected profits in years 1 and 2 for the high and moderate advertising intensities), the team leader recommends a low advertising intensity in order to maximize the value of the firm. Do you agree?

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In the highly competitive automotive industry, strategic advertising plays a crucial role in influencing consumer behavior and shaping brand perception. When launching a new energy-efficient SUV, a company must carefully evaluate advertising investments' short-term costs against long-term benefits, including brand loyalty, market share, and profitability. The question posed involves selecting an optimal advertising intensity—high, moderate, or low—that maximizes overall firm value, considering profitability projections, sales volume, and return on advertising expenditures.

Analysis of the given data indicates that higher advertising intensities, while potentially boosting sales volume and market visibility, come with significant upfront costs that diminish short-term profits. The profitability projections show that in Year 1, high and moderate advertising generate profits of $15 million and $30 million, respectively, whereas low advertising results in $70 million profit. Similarly, in Year 2, profits are $90 million (high), $75 million (moderate), and $105 million (low). Data suggests that higher advertising levels reduce profits early on, perhaps due to the high costs associated with aggressive campaigns. This notion aligns with typical marketing expenditure patterns, where investments in advertising yield delayed but sustainable increases in sales and profits.

In addition to these short-term profit considerations, the projected units sold and average selling prices are pivotal. The units sold increase with higher advertising investment: 24,000 (high), 24,500 (moderate), and 24,800 (low) thousand vehicles. Despite the slight variations, the difference in projected sales is marginal. The consistent increase in units sold with lower advertising spend indicates diminishing returns on advertising expenditure, a phenomenon well documented in marketing literature (Stern and El-Ansary, 2012). Moreover, the average selling price across all levels remains relatively stable, suggesting that advertising intensity may have a limited impact on premium pricing in this context.

Financially, the department estimates that the funds allocated for advertising have an opportunity cost, with an alternative investment yielding a 10% return. To determine whether to pursue low advertising intensity, one must compare the net present value (NPV) of profits over the forecast period for each alternative. This analysis involves discounting projected profits at the 10% rate to reflect the opportunity cost of capital. The low advertising scenario, with its higher short-term profits, offers a more attractive NPV, particularly when accounting for the costs associated with higher advertising levels that temporarily suppress profits.

From a strategic management perspective, prioritizing low advertising intensity aligns with sustainable long-term profitability and shareholder value maximization. The costs associated with high and moderate advertising campaigns in the initial years could be better allocated to other growth initiatives, such as product innovation or dealer network expansion. Furthermore, an aggressive advertising approach, while suitable for mature markets or established brands, may not be necessary for a new product emphasizing energy efficiency, where consumer education and reputation building are vital.

Adopting a low advertising intensity also positions the automaker to leverage word-of-mouth, environmental credentials, and residual brand strength through organic channels, all of which are increasingly influential among environmentally conscious consumers. As noted by Keller (2013), brand equity built on authenticity and value can outperform high advertising spend in sustaining market position over time.

Nevertheless, some counterarguments support moderate or high advertising levels. These include capturing early market share, deterring competitors, and establishing the vehicle's energy-efficient attributes as a dominant feature. These benefits, however, must be weighed against the immediate financial burden and potential reduced profitability in the short term.

Overall, based on the provided financial data, strategic considerations, and opportunity cost analysis, the recommendation to adopt a low advertising intensity appears justified. It maximizes profitability, minimizes upfront costs, and preserves capital for alternative investments, ultimately enhancing shareholder value. However, continuous market monitoring and flexibility to adjust advertising levels based on real-time feedback are advisable to adapt to evolving market conditions and consumer preferences.

References

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