310 The Marketing Book
pendent company, it would lead to the expecta-
tion of an equivalent fall in the share price.
As the example shows, even in a recession,
effective communications are not just covering
costs, but bolstering the share price in a clear
and measurable way. They do this, not so much
by increasing sales, but by reinforcing the
ability of a strong brand to generate continuing,
long-term cash flow.
Distribution strategies
Today, innovation in distribution is becoming
one of the most significant ways firms can
create competitive advantage. The triggers
have been the desire of consumers for greater
convenience, global competition forcing com-
panies to search for new ways to cut costs and
capital employed, and facilitating technologies,
notably information technology and the Inter-
net. New distribution strategies are offering
consumers greater benefits in terms of conveni-
ence, speed, accessibility and lower costs that
are offering pioneering companies opportun-
ities to leapfrog competitors. Besides market
advantages, these companies can often sig-
nificantly reduce their operating costs and
investment.Table 11.5 The effect of cutting the advertising budget
Year12345Shareholder value – maintaining budgets(£ million)
Sales 20.000 20.000 21.000 21.210 21.422
Gross margin 8.000 8.000 8.400 8.484 8.569
Fixed costs 5.000 5.000 5.000 5.000 5.000
Advertising 2.000 2.000 2.000 2.000 2.000
Profit after tax 0.700 0.700 0.980 1.039 1.098
Investment 0 0 0.400 0.084 0.085
Cash flow 0.700 0.700 0.580 0.955 1.013
Present value 0.636 0.579 0.436 0.652 0.629
PV of forecast cash flows 3.948
PV of continuing value 6.819
Corporate value 10.767Shareholder value – cutting budgets(£ million)
Sales 18.000 17.100 16.670 16.649 16.639
Advertising 1.000 1.000 1.000 1.000 1.000
Profit after tax 0.840 0.588 0.468 0.462 0.459
Investment 0 –0.36 –0.172 –0.008 –0.004
Cash flow 0.840 0.948 0.640 0.470 0.463
PV of forecast cash flows 3.361
PV of continuing value 4.589
Corporate value 7.950
Value loss 2.817