Strategies for Brand Revival

Strategies for Brand Revival INTRODUCTION The world, it seems, is disappearing beneath a deluge of logos. In the past decade, corporations looking to navigate an ever more competitive marketplace have embraced the gospel of branding with newfound fervour. The brand value of companies like Coca-Cola and IBM is routinely calculated at tens of billions of dollars, and brands have come to be seen as the ultimate long-term asset economic engines capable of withstanding turbulence and generating profits for decades. So companies spend billions on brand campaigns and try to indelibly mark everything in sight, from the ING New York City Marathon to the Diamond Nuts cup holders at SBC Park. Marketers may consider the explosion of new brands to be evidence of brandings importance, but in fact the opposite is true. It would be a waste of money to launch a clever logo into a world of durable brands and loyal customers. But because consumers are more promiscuous and fickle than ever, established brands are vulnerable, and new ones have a real chance of succeeding for at least a little while. The obsession with brands, paradoxically, demonstrates their weakness. Therefore, sometimes in business, a good brand dies. Everyone knows and respects the brand, but theres a gap between peoples knowledge and their desire to actually buy the product. When the company cant close that gap, the brand slowly but surely finds its way to the dustbin of history (Mannie Jackson, 2001). Therefore, the biggest question that a company can face is the decision whether to revive the brand or let it die. And if revive, how? But before we go further on to answer this question, its critical to understand why brands fail or die? Is it lack of consumer interest? Or introduction of new brands? Or is it something as simple as ignorance to the changing market dynamics? Lets look at an article from Business line which gives us a view point on the same: Why must brands die at all? And why do they die?1 The answer is a simple one! Brands never die. There is just no organic death in the life cycle of brands. In fact, there is just no life cycle at all! Lets bury this brand-ism once and for all! Brands are meant to live on forever. Brands dont die. Instead, they are murdered by Brand Managers. The over-zealous and the lazy ones alike! Most of the time done to death by stubborn brand-folks who just dont see the future unraveling! One common thread that is seen in brands that actually die on the cushy laps of their emotional brand owners is their inability to embrace change. The lack of flexibility to adapt and adjust to a changing market scenario that is as unpredictable as ever! Brands traverse the trajectory of slow death as soon as rigidity in their management styles step in. And there are many styles equally guilty of forcing their brands onto the track of death near or distant! Brand Management is as dynamic a subject as any. It i s as dynamic in its changes, as is society itself. Brands need to change and adapt to their customers and consumers. They need to be in sync with the psyche of their target segment. Rigid brand managers are the biggest liability to the brand. The solution: Keep changing them every 18 months for a start! The second brand sin is perpetuated by the jumpy brand manager who wants to prove a point. The guy knows for sure he is a short-tenure resource on the brand. He is young and raring to go. He has read enough of the brands mystique. He now wants to leave his indelible mark on the brand he is slated to handle. The intelligent brand manager of the future is the guy who sits between these two points of action and inaction. He is one who knows his strengths and his gaps alike. He is therefore the sutradhaar who knits the purpose of the brand and its longevity together by bringing to the brand party every resource that he deems necessary. Bring in that sociologist who will give you a quick perspective of how society is morphing, bring in that practicing psychologist who will psycho-analyze your consumer of today and hopefully tomorrow! Bring in the holistic market  researcher who will look beyond the tools that are quantitative, qualitative and eventually a cusp of the two! Bring in the dentist and the tailor if necessary! Brands die due to neglect. Due to a lack of accepting change. Due to stubborn, age-old thoughts, Managing brands is an art, a science and a philosophy as well! Practice each of these with perfection and humility! As we can see the article clearly talks about how brands di e due to peoples choice between in-action and action. But what happens when a company intentionally kills its flagship brand? Lets have a look at an article that talks about how Ford beheaded its once flagship brand The Ford Taurus. There are some important pointers to be learnt from this article. How to Kill your Brand 2 The Ford Taurus was a brand success of the 1990s. Its jellybean shape helped pioneer aerodynamic and dramatic styling when it was introduced in 1985, a time when most Japanese and American vehicles were little more than square boxes with round wheels. It had a powerful but fuel-efficient V6 engine. The moderately priced car made middle-class buyers feel like they were standing out without sticking out. The Taurus revived a Ford that was on the financial ropes. Ford sold 263,000 units the first year. In 1986, Motor Trend magazine named the Taurus Car of the Year. A year later it was Fords best-selling car. By 1992, it had surpassed the Honda Accord as the best-sell ing passenger car in the US. It kept that title for five straight years, outselling both the Accord and the Toyota Camry. Eventually, Ford sold about 7 million Tauruses and 2 million Mercury Sables (essentially the same car). But at the end of 2006, the last Ford Taurus rolled off the line at an assembly plant in an Atlanta suburb. Says Peter DeLorenzo, publisher of auto-extremist.com, an automotive website: Ford is the only auto manufacturer in history to take a number-one-selling car and systematically destroy the franchise through a fatal combination of ineptness, incompetence and flat-out neglect. 8 The death of the Taurus is a contributing reason why Ford reported a $5.8 billion loss last October, the worst in 14 years, announced the closing of 14 plants (including the plant that produced the Taurus), and now wants to borrow $18 billion to help revive the company. How did this king of automotive brands get beheaded? Ford provides a textbook case in how to destroy a brand. Key lessons include: Ignore your target customer segment: The Taurus was most popular among 50+ consumers, the group with the most disposable income. But Ford was entranced by the 18-35 group, and redesigned the car twice to appeal to this segment. The redesigns turned off the Taurus customer base while failing to turn on younger buyers. Listen to the customers who actually buy your product, not the ones you want to buy your product. Stop promotion: Unbelievably, Ford stopped advertising one of its best-selling cars for two years. Thats one reason Taurus sales dropped from a high of 410,000 in 1992 to 145,000 in 2006. Remember that advertising and promotion is not just for new products. It is also for established products. Undercut the value: When sales started declining, Ford took the quick and easy route of expanding sales to rental companies as well as taxi and corporate fleets. It also substantially boosted dealer and other discounts. While these have the temporary effect of juicing sales, they also harm profits for companies and resale value for customers. Never do anything that hurts your brand among existing customers. Focus on new, and not loyal, customers: Remember the Contour, Windstar, Escort, Galaxy and many other Ford brands? Automotive companies are infamous for spending millions to develop and promote brands, then inexplicably orphaning them years later to devote resources to newer models. Abandon a product only when it is truly at the end of its life-cycle, not because something sexier comes out of product development. Cannibalize your product unnecessarily: Fixed costs are high in the automotive industry, which means that profitability depends on volume. Ford cannibalized sales of Taurus by introducing the slightly bigger Five Hundred, and the slightly smaller Fusion. The Fusion, which came out in late 2004, has been a hit, but sales of the Five Hundred have not met expectations. Would Ford have been better off devoting the resources  dedicated to Fusion and Five Hundred to the revitalization of Taurus? Who knows? However, while it is important to be receptive to new segments, gains must be measured against the losses to established products. The articles also states examples of other iconic brands like Wonder Bread and Twinkies that have been immortalized by Andy Warhol. Yet the manufacturer of those brands, the $3.5 billion Interstate Bakeries, filed for bankruptcy last September. Mistakes made by Interstate include focusing on low-profit, mass-produced products like Wonder Bread at a time when customers were turning to tastier alternatives like fresh-baked supermarket offerings. They rested on their Twinkies laurels at a time when mothers everywhere were worried about childhood obesity. There are other brands that are on their road to failure. Two strong candidates are Gap and Time magazine. Quick excerpt on GAP (details in next article) At one time, Gap set the fashion benchmark for both boomers and yuppies. Who hasnt owned a pair of Gap khakis? In UK, Gaps share of the clothing market has dropped by 25% over the past three years. Its recent advertising featuring Audry Hepburn has done little but make worst ad- lists . What happened? Gap committed the ultimate branding sins a lack of focus and knowledge of what its customers valued. Robert Buchanan, a retail analyst at the stockbroker AG Edwards, says: In their heyday, they were really good at taking care of the baby boomer . They stopped targeting them and started aiming for the children of the boomers but not having done much research, they blew it. Then they took a democratic approach and tried to be all things to all men. If theres one thing that doesnt work in retailing, its a lack of focus. The articles opinion on Time Magazine If there is a better example of trying to be all things to all people; its Times recent choice for Person of the Year.- For more than 70 years, Time has selected a person who has had the most impact for good or bad on world events. Agree or disagree, Times choice always made you think. But this year, they put a cheesy reflective Mylar strip on the cover and said, The Person of the Year is You!- If you believe that a brand must drive its stake into the ground and say proudly, this is what we stand for, and these are the customers we want- then Times we-love-everybody- pandering is a reason to cringe. This 10 follows other missteps, like putting radical Ann Coulter, who advocates terrorism against American institutions and believes that all Muslims ought to be forcibly converted to Christianity, on the cover, and recently adding Bill Kristol, who forcefully advocated the invasion of Iraq to bring peace and democracy to the Middle East, as one of its star columnists. (Full disclosure: I used to work for Time-Life.) Talk about alienating middle class customers, the bread-and-butter of a mass-circulation magazine. A lot has been written about how to build a brand. But valuable lessons can also be learned from dead and dying brands. Undoubtedly, the most important lesson is not to let a disconnect grow between you and customer. When was the last time you talked to customers about what they valued, and how well you were doing to deliver that value? Now let us look at an article that goes into the details of the story of the GAP decline: American retailing: Fashion victim 3 Gap, a fashion retai ler that was once one of corporate Americas shining success stories used to get everything right. Its affordable, trendy clothes epitomized casual cool. But not anymore. The companys production cycles are too slow to keep pace with rivals, prices have risen and the brand has lost its shine. In 29 of the past 31 months Gap reported flat or declining same-store sales. Senior executives are quitting in droves. Profit margins, at 6.5%, are about half the industrys average. In December, traditionally the busiest month for shopping, same-store sales were 8% lower than in December 2005. Gap is now said to have hired Goldman Sachs, an investment bank, to evaluate its options. This is not the first crisis at Gap. Analysts think a change at the top is the most likely outcome of the review. Another possibility would be for Gaps ageing founders, who still own 37% of the group, to sell out. Dana Cohen, an analyst at Bank of America, thinks private-equity firms would be the most likely buyers, as few companies in the trade could swallow Gap. Alternatively, one of the groups three major brands could be sold. The trouble is that both Gap and Old Navy would sell at a 11 discount because of their troubles, and the Fishers (the founders) are unlikely to want to divest Banana Republic, their only healthy brand. Brands can also die due to lack of company focus or initiative. As the article states they can die of natural causes it is inevitable due to various actions taken by the company or the people. Autopsy on Olds: Death by neglect, stagnation4 Oldsmobile once was among the strongest car brands, anchored by such vehicles as the Cutlass, infused with the heritage of Rocket engines and benefiting from a competent dealer network. Yet the 107-year-old brand was officially buried this spring. Was the death inevitable? Might better communications around the brand have helped effect a cure? Many myths come into play when once-great brands such as Oldsmobile expire. Among the most durable: Strong brands die of natural causes In fact, brands die of neglect and abuse. It takes effort and many bad decisions to kill a strong brand. Oldsmobile died because General Motors designed vehicles in the 1980s and early 1990s that didnt live up to the brands legacy: They were unattractive, uncomfortable and of low quality, and they handled poorly. At the same time, the dealer network atrophied and consolidated with other brands, losing its focus on Oldsmobile. Customers who were dissatisfied with Olds vehicles, sales and service lost their emotional connection to the brand. By the time GM finally came out with a somewhat decent vehicle for Oldsmobile the Alero in the late 1990s it was too late. Changing consumer tastes kill brands. What really kills a brand is its failure to respond to changing tastes. Let us look at an example of how a brands responded to changing tastes from the same article and today is the symbol of how brands can evolve and become part of peoples lives and personality Harley Davidson and Cadillac (a glimpse): LITERATURE Sometimes in business, a good brand dies Everyone knows and respects the brand, but theres a gap between peoples knowledge and their desire to actually buy the product. When the company cant close that gap, the brand slowly but surely finds its way to the dustbin of history (Mannie Jackson, 2001). The question is: To leave it there or bring it back to life? An even bigger question is, how to re-create the magic? PROBLEM DEFINITION The purpose of this study is to analyze different strategies adopted by target companies during the process of brand revival. The study will involve analyzing case studies of a sample of companies who have been engaged in brand revival. This study will also serve to address strategies that can be adopted by companies who are in the need to revitalize their brands and the reasons for their death. For example companies have used several strategies to successfully revive their brands. These actions are prominent as is evident in the case of Harlem Globetrotters who survived by reinventing their product. (Mannie Jackson, 2001). RESEARCH METHODOLOGY To get a deeper understanding of the chosen topic, various case-studies will be analyzed so as to investigate the various strategies used by firms and use the findings to establish a set of tactics and success factors. These case-studies will primarily be sourced from secondary data like the 4 various books on brands, newspapers, historical data of companies, journals, business magazines, internet etc. JUSTIFICATION FOR RESEARCH PROPOSAL In todays dynamic environment, companies often have to face circumstances where their brands are in danger of falling out of customers buying radars. In todays highly competitive environment, it is not only products that need to be upgraded but brands also need a new lease of life. No longer is it taken for granted that upgraded products will keep a brand running, but brands itself need to be revived to be in tune to customers desires. This research explores the strategies followed for a successful brand revival. SCOPE Since this study deals with an analysis of case-studies, its scope is wide and the analysis paradigm is not limited to one country or industry. This is an empirical study that has a wide scope and applicability across industries and geographies.

The Principle

Legal moralism has been a principle that prohibits people from acting or engaging in things which are detrimental to the society with the use of laws and its enforcements. This includes laws which prohibit certain actions that can lead to several problems that may affect the whole social fabric. Such laws include those that prohibit the use of illegal drugs, prostitution and abortion. This actions or engagement in this type of acts may most likely affect the citizens in a rather negative matter that could destroy not only the participating individual’s life but also the lives of the people around him. In line with this principle is a principle that shall limit a person’s liberty through the use of customary rules prescribed by the society in which the person lives. It differs from the principle of legal moralism in the sense of â€Å"formality†. Restriction of Liberty While legal moralism is concerned about constitutional laws, this principle is more likely inclined to the limiting effect of customary moral rules which are more effective than legal laws. This principle shall from this point onwards be referred to as customary moralism principle. This type of principle acts in the same manner that legal moralism does. However, as stated above, traditional moralism is more effective than legal moralism. Its effectiveness lies on the way that it has been formulated. Compare and Contrast Unlike most legal laws which determines the right and wrong inscribed as laws of the society, customary rules and traditions determines the right and wrong principles which lies in the culture of a society. These rules have been tested through time and generation by the whole society. This is the reason why these laws are easier to understand. People find it efficient since it was directed and made through the use of actual and practical experiences. Unlike legal laws which are mostly hypothetical and less pragmatic. Legal laws are made by an assembly of men that shall represent the whole society in a conference or convention. Customary rules are prescribed mostly by elders, who have more experience than the present generation. Since these rules are based and may differ in experience, they are not implemented in the society in a forceful manner. Instead, society shall pick what rules are still beneficial and applicable in the situation. Thus, customary rules undergo practicality checks, every time the rules are being implemented or are being followed. Society: Laws versus Tradition It evolves with the society. It represents the society. People are more inclined to follow this principle not because of its force but because of customs and traditions. For instance, the introduction and the success of organizations such as the Cosa Nostra which is more popularly known as Mafia, prevails even after there have been several legal precautions and actions taken. The Mafia is an organization which is generally against the fascist regime that dominates the Italian region. Since it is an organization, it has several guiding principles and rules that enable the group to grow and survive. Accordingly, the Mafia acts as a second government in areas such as Sicily. The rules that were constructed or enforced by the Mafia are followed more religiously than the laws enforced by the government. Omerta, a favorite law in Mafia is the law of absolute silence that denotes an individual could not say anything that would expose the Mafia. Even, if it means that they could be incarcerated, tortured or even convicted, it was believed that the Sicilians would not tell a word or would deny anything he knows. Legitimate Traditional   Actions Actions which this principle might consider as legitimate are mainly actions which are traditionally been accepted by the general public that were made legal. In some country, prostitution is legal since it has been traditional. In the Netherlands, the use of â€Å"marijuana† is legalized. There are also some countries that legalize abortion if the fetus is not more than three months. These types of prohibitions by the law rooted from certain traditional beliefs and customs of the people. Traditional moral principles which have legal counterparts could be interfered by the law. However, there are certain traditional beliefs such as burning of animals for sacrifices wherein authority and law has no right to intervene. Commonly, traditional rules which are considered as legitimate are those which promotes the welfare of the society. This are the societal norms which are approved by the government and are thus legalize. Thus, the legitimacy of any traditional action depends on which government or country an action was made. Traditional Moralism versus Harm Principle and Paternalism Traditional also to fraternities are hazing ceremonials and rumbles. If Traditional moralism would be used, this type of action would be normal. However, of course, this would create problems in the legal realm. In such case this kind of actions shall be controlled by the proper authorities such that this would not cause death or other mass violence. This action would either fall in the harm principle or paternalism. It falls in the harm principle since it must be controlled or even not permitted if it induces harm to other people. It falls under paternal principle because there are laws which prohibit fraternity violence in able to protect the members of the fraternity from injuries by refusing to recognize fraternities who are recorded to conduct delinquently. While legal moralism is against actions such as gambling and prostitution, traditional moralism permits them. In this regard, traditional moralism could be seen to fall under the harm principle. Traditional moralism could also fall under paternalism in the sense that it is a guide for action through rules set by the majority of the society in able to control certain actions that would negatively affect the society. Defense of Traditional Moralism I believe that traditional moralism could effectively restrict freedom in able to promote the welfare of a society since it is constructed through convention by the society. It is more likely to be more effective since it commonly involves the norm within the society. Although this might create several factions in the society that might create their own traditions and customs, this kind of interferences might not be able to make it through the main stream culture. Failing to do so, these actions would be considered as deviant by the society in which their actions are not permitted. Traditional Moralism can also be viewed as a principle that acknowledge and encourage liberty, more than restricts it. This is not arguable and may in fact be true, more likely when the legal rules is composed of laws which is not suitable and is not agreeable with the society. Such as laws which are imposed only by the government or by another government in a particular country. This could best be demonstrated on colonized countries or in war-stricken country such as Iraq. The laws that the American government may not be suitable or efficient in the society such as in Iraq; in such case traditional moralism would be more beneficial and applicable than legal moralism. Reference Leighton, P. (2007). Paternalism and Legal Moralism. Retrieved on November 14, 2007. Retrieved from: http://www.paulsjusticepage.com/cjethics/2-limitsoflaw/harmprinciple.htm

Leaders vs Managers Essay

According to many scholars, management is a basically the implementation of already established processes such as planning, staffing, measuring performance and budgeting thereby enabling an organization to do well. On the other hand, leadership is entirely different. It can be described as taking an organization to the future, exploring and successfully exploiting opportunities that come up. Leadership is about having vision, empowerment and most importantly providing useful change in the organization. The main differences between leaders and managers are: the relationship between the followers and managers and leaders, how leaders and managers solve problems, and the difference in emotional intelligence between leaders and managers. Leaders and managers have a difference in emotional intelligence. A leader is an individual who strategizes a visionary and most importantly someone who inspires other people to greatness. In order to achieve this, while leading one must share their vision with the staff or people brought together to solve a problem or create a strategy. Leaders serve as role models, motivate their staff, inspire cooperation and create a community both inside and outside of the organization. They mostly follow their intuition which in most cases benefits the company and in most cases they gain followers who become loyal to them and the organization. This is a direct contradiction to managers who carry out their instructions by the book and follow the organization’s policy to the letter and as a result the staff may or may not be loyal to them. Even when the idea of a divinely appointed leader prevailed, there existed a contrary view that the leader was actually empowered by followers, this theory was analyzed by Thomas Paine â€Å"Titles are but nicknames†¦it is common opinion only that makes them anything or nothing . . . . [A]body of men, holding themselves accountable to nobody, ought not to be trusted by anybody† (1944, pp. 59-60, 63). Another major difference between leaders and managers is how their duties and relationship with their followers differ. A leader creates or rather innovates whilst the manager administers , meaning that the leader is the individual who comes up with fresh ideas in order to move the bulk of the organization into a new direction that is more beneficial and profitable. He has to come up with new strategies and tactics by keeping his focus on the  horizon constantly. It is important for him to be updated on the latest trends as well as studies and the skill sets. Contrary to this, a manager simply maintains a system that has already been established and is in use. It is his duty to maintain control and ensure that things run normally and everyone in the staff is pulling their weight and contributing fully and effectively. One of the distinguishing characteristics of a typical manager is how dependent he is on the activities of a variety of other people to perform his job effectively. (Kotter, 1983, p. 360). He is rigid and unable to be creative in carrying out his duties, thereby barring him from being considered a business leader. According to Richard Rosenberg, (1992) one of the most profound examples of the difference between leaders and managers is how computers create significant changes in any organization. He illustrates how information is able to travel from top to bottom effectively without the intervention of managers somewhere in between. This shows how the difference between leaders and managers which is that managers are easily replaceable and in some cases they are not required at all to some extent. Leaders inspire greatness and effectiveness unlike managers who more or less rely on control. In other words, leadership is not what one does but actually how they respond to you. If people do not choose to join your cause then you cannot really be considered as a leader since they have inspired no one. If people do indeed join your cause then it would mean that you have inspired them, thereby creating a bond with them and the company, which is very important particularly if the organization or business is changing rapidly and needs people who believe in it to support its mission. Leaders and managers handle and prepare for problems in a different ways. Managers prepare themselves for turbulent times and during these times the primary task is to make sure that the organization’s capacity to survive and to ensure that the it maintains its structural strength as well as is capacity to survive failure and adapt as quickly as possible in the shortest time period (Peter D., 1980). Business leaders instill a staff loyalty that a manager cannot be able to because of his rigid methods and lack of spontaneity. In the case of managers, their primary job is to control their  staff by aiding them to develop their assets and discover their greatest talents. In order to do this they have to know the people working for them and understand their abilities and interests. G. Lumsden (1982) describes how middle managers model themselves on top managers in a form of hierarchical mimicry: what happens is that the behavior inheritance persists. As it is passed down deeper in the organization, sans power, such behavior begins not to work so well. And at lower levels it gets muddied even further because it’s being used on individuals who don’t understand it, aren’t impressed by it, or are downright opposed to it. (p. 8) A leader focuses on the reasons why to make certain decision whereas a manager considers how and at what times decisions are made. Managers prefer to execute plans accordingly and maintain the status quo without deviating even when failures are experienced. If the company experienced failures, then a leader would learn from it and use it as a clarification point in order to get better and avoid losses in future. Levine and M. Crom (1993) in their book â€Å"The leader in you† highlight an example of leadership changes and state that â€Å"Good human relation skills have the ability to transform people from managing others to leading them. People can learn how to move from directing to guiding, from competing to collaborating and from operating under secrecy to one of sharing all of the information required, from a mode of passivity to a mode of risk taking, from one of regarding people as an expense to one of viewing people as an asset,† (P.15) In conclusion, management and leadership are not necessarily mutually exclusive. They are however different in that leadership entails inspiration as well as steering an organization whereas management is simply overseeing and delegating.

Finance the future of the energy sector - Free Essay Example

Sample details Pages: 9 Words: 2790 Downloads: 7 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Question A A major problem for decision makers in enterprises is the evaluation of potential investment projects that can absorb capital assets. This evaluation, also known as investment appraisal, is really crucial for the future of any firm, since it determines the financial sources of the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s budget and ultimately defines the level of the shareholders wealth. In theoretical finance, several methods of investment appraisal are developed in order to help financial managers or accountants to evaluate with increased certainty cash flows, viability and profitability of any investment project. However, many empirical studies have shown that financial decision makers do not always adhere to the investment appraisal methods that theory provides[1]. Business experience has shown that contrary to theory, the appraisal of some investment projects is far more difficult because even the implementation of a specific appraisal method is ambiguous and subject to factors beyond financial theory. This essay will discuss the problems associated with the implementation of different appraisal methods using a case study to illustrate the exact nature of these problems. The potential source of capital that will be used to finance the specific investment project might influence the long-term financial state of the firm, and of course the shareholdersà ¢Ã¢â€š ¬Ã¢â€ž ¢ wealth. Thus, the financial decision makers, who ultimately aim at the maximisation of the shareholders wealth, face an additional question to investment appraisal. This question will also be examined in this essay. Don’t waste time! Our writers will create an original "Finance: the future of the energy sector" essay for you Create order The most fundamental investment evaluation method takes only into account the time period that is necessary for the invested capital to be paid back. This method is known as the payback period method. The primary advantage of this evaluation method is its simplicity, since a basic concern of financial managers is how soon the invested capital will be available for re-investing. Payback method is particularly useful to small firms that are in shortage of available cash, thus they want to track easily the time limits of their capital flows. However, a main drawback of payback is that it may lead to short-eyed decisions, since it ignores returns that might appear right after the end of the payback period. If an investment project yields high returns right after the end of the requested payback period, this method will evidently reject it. Another significant weakness of this method is that it ignores the broadly accepted fact that the value of money today is not the same as the value of money tomorrow. Essentially, between two investment opportunities with the same payback period, the one that yields more returns sooner should be clearly preferred. Thus payback method entirely fails to comprise different patterns of cash flows within the payback period. Another common method of investment appraisal is the accounted rate of return (also called Return On Investment or Return On Capital Employed). This method simply constitutes of a percentile average profitability-on-investment ratio and is popular due to its easy deduction from any given balance sheet. In this technique, as also in payback, no account is taken for the difference in the value of subsequent cashflows. Furthermore, since profitability is not certain at the beginning of the project, the ARR method is likely to be misleading in the process of investment appraisal. A more common use of this method is to measure the overall profitability after an investment project is over or the ability of a financial manager to evaluate and decide on the most profitable and less risky investments. The basic drawback of the two previous investment appraisal methods is that they fail to include the fact that the nominal value of a cashflow today is different from the real value of a cashflow with the same nominal value in the future[2]. Thus, if a technique can discount the future value of a cashflow into todayà ¢Ã¢â€š ¬Ã¢â€ž ¢s real terms, it could provide a better criterion on which investment project is more profitable. A technique that incorporates this discounting principle is the Net Present Value (NPV) method. In this method, all future cashflows can be interpreted in real present values, and so if inward cashflows are greater than outward cashflows the investment project can be selected. The discounting rate used for the decision is substantially the cost of capital, which of course has to be less than the rate of return. Under this principle, decision makers can chose between alternative and mutually exclusive projects, based on which NPV is highest. The aforementioned rate of return can be used alternatively in another investment appraisal technique, which also incorporates the discounting principle. Instead of discounting future values into present terms, one can compare directly the rate of return with the cost of capital. This technique is known as the Internal Rate of Return (IRR) method. This rate of return is the same one used to calculate NPV in the previous method. In practice, IRR can be difficult to calculate and its usefulness might be unclear to some decision makers. This is due to the fact that if the proposed investment requires more than a one-off outward cashflow, the rate of return might change in the duration of the project. Clearly, in an investment project that requires only one outward cashflow and regular inward cashflows both NPV and IRR methods will produce the same results. However, mutually exclusive investment projects are not easily compared since the discounting principle applies on the whole initial outward cashflow of each investment, allowing for some of the inward cashflows to be re-invested. An example of a real UK investment follows to show illustratively the problems in the selection of an appropriate investment appraisal method. The increased environmental sensitivity that has arisen in the last 25 years due to energy sources depletion issues and atmospheric pollution, provided motivation for research and evolution of renewable energy sources. In the UK, several renewable energy technologies have been put under consideration from the authorities. Renewable energy production technologies are very ambiguous investment proposals for several reasons: firstly, their research and application is still in very primary stages and their implementation requires extremely high costs; secondly, none of these technologies is adequate by itself to provide substantial energy capacity whereas several technologies have to be simultaneously developed (at least some of them) in order to provide a significant substitution to environmentally unfriendly technologies; finally, since none of these have been previously implemented, it is very hard to examine to which extent they will be accepted and whether they will be financially viable or not. Under these particularly unclear assumptions none of the technologies would ever be promoted, at least from a financial managerà ¢Ã¢â€š ¬Ã¢â€ž ¢s point of view since they all involve a large amount of financial risk. However, renewable energy is the future of the energy sector and several economic motivations have been created from the UK government in order to attract the interest of individual and corporate investors. The Non Fossil Fuel Obligation (NFFO) and the Kyoto Protocol force UK governments to ensure investors for high amounts of risk, so that renewable technology can proceed. In this case, the government pays a risk premium added to the price for each renewable energy unit produced. It is estimated that more than  £1bn capital value will be invested in the UK before 2010. Some of the first UK initiatives for renewable energy were The Wind Fund plc (that secured long-term capacity contracts under NFFO) and Baywind Energy Cooperative that firstly launched wind farms and small hydro plants in Cumbria. Other initiatives come from Fenland Green Power Investments and Eastern Generation. As an attempt to support these investment projects, local authorities have been invited to contribu te to the investment projects by contributing to the equity capital through local community funds. But how the investors will chose which investment opportunity is more profitable? Clearly, in this case the payback and ARR method cannot be of any use since a payback period is not acknowledged (it is uncertain if some technologies will ever be implemented at all) and accounting data are not yet available for most of them. Table 1 Discount rates, risk rating and economic estimates for the implementation of renewable energy production IRRe % Risk rating Estimated Output (MW) Capital Value ( £m) p/kWh Biomass-Biofuel 24.8 0.71 1 4 5.10 Municipal Waste Incineration 14.5 0.63 12 47.3 3.23 Small wind (600kW) 6.2 0.61 0.6 0.42 4.57 Large wind (20MW) 16.7 0.51 20 13 3.53 Small hydro (1MW) 10.5 0.48 0.89 1.3 4.25 Large hydro (5MW) 24.8 0.42 4.35 4.3 4.25 CCGT 14.0 0.46 475 142 2.50 Landfill gas 17.1 0.39 1 0.78 3.01 (source: Ernst Young, ref.K/FR/00090/REP) Obviously, the most appropriate techniques to be used in this case are the ones incorporating Discount Cashflow. The NPV approach, although sound for this kind of question, needs to put down specific values and also define time expectancy. On the other hand the IRR budgeting approach provides rates of return that are easy to interpret and for that reason this approach is generally preferred in industry level investments. Given the rate of return, a financial manager only has to know the interest rate (cost of capital) at which he can borrow in order to know instantly if the investment project is viable. Table 1 gives an idea of the discount rates calculated for each renewable technology. Notably these investment projects are not excluding each other, which means that evaluation with NPV would be very complicated. Hereby, this essay does not assume that IRR method is better or more preferred than the rest of the methods discussed above. On the contrary, this essay disputes that à ¢Ã¢ ‚ ¬Ã…“ à ¢Ã¢â€š ¬Ã‚ ¦Ãƒ ¢Ã¢â€š ¬Ã‚ ¦there may be a place for all the techniques of investment appraisal in the management accountantà ¢Ã¢â€š ¬Ã¢â€ž ¢s armoury. However, a thorough understanding of their theoretical nuances is importantà ¢Ã¢â€š ¬Ã‚ . Question B Once an investment project has been evaluated and approved, financial decision makers should decide how and from where they will acquire the necessary capital to fund the project. Firms can finance their investment projects using several capital sources: quoted shares, quoted long term loans, government subsidiaries (like in the case above for NFFO) or internal finance. All these different sources of capital create different sets of obligations to the firm and also are rated differently in terms of risk. The capital that is drawn from shareholders takes the form of equities. When a firm sells a share, it agrees to pay back the buyer a dividend at the end of each year. Thus the firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ obligation to the shareholders lasts to perpetuity. That is the main difference between the equity and the loan. A loan represents an investment of an individual or institution for a contractual fixed period that yields subsequent contractual returns, and also an obligation to the borrower to repay the whole capital and its cost in the contractual time periods. When a firm finances its investments with loans, an outward cashflow is created until the loans are redeemed. Obviously, the investment is supposed to create inward cashflows that can repay the loan (nominal capital plus interest). In case the firm is liquidated, all loans have to be repaid, by law, before any dividends can be paid back to the shareholders. In that sense equity providers face a higher risk than lenders. A firm acquires a long-term loan by issuing bonds, or otherwise notes that certify the nominal value of the bond, its cost to the lender (the coupon rate) and the specific repayment dates. The cost of the debt capital as expressed by the coupon rate is actually the rate of return for the creditors, but in the same time it is the opportunity cost for the firm. However, the important issue for financial managers is to acquire debt, at a specific level of risk, that can be repaid but also that gives the maximum expected rate of return. A firm has the ability to change its financial structure according to the prices of bonds and shares in the market. If bond prices are high, the firm can issue more bonds or if share prices are high the firm can issue more stocks. Of course, the extent of this decision lies entirely to the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s predictability of profits. If an investment evaluation was accurate and the firm can guarantee repayments, then it can issue more bonds. If the firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s inward cashflows are volatile, creditors impose greater interest on loans and thus the firm will issue shares in order to acquire cheaper capital. In other words, debt capital should only be invested in projects that yield the highest possible returns for the same risk levels, especially if financial managers wish to maximise shareholders wealth. Thus, a company that issues more long-term bonds should make sure that the investing of this debt capital should be done in the highest possible rate of return. Otherwise, the shareholders face unnecessary increased debt capital risks and the firm should limit its borrowing to avoid bankruptcy. Since debt capital is less risky to creditors that equity capital to shareholders, the firm should be expecting a higher rate of return from investments financed from equity capital than investments financed from loans. However, this is not always possible because there is a limit to the number of shares that a company can issue. For this reason, firms issue preferred stock or different kinds of bonds in an attempt to acquire capital in the best possible terms but also to reduce the possibility of default. In conclusion, this essay examined the different techniques used in investment appraisal and their potential use from firms to evaluate investment opportunities. The payback method, based on a simple rational, is particularly useful to firms that do not have broad access to finance and need to invest with increased certainty. Otherwise, payback method can be very misleading. The Accounting Rate of Return method can be an easy median to evaluate investment decisions, especially after their fulfilment, but does not take into account the time devaluation property of money. Thus it can be also misleading when ARR is directly compared with the cost of capital. For this important reason, methods that incorporate the discounting principle can be more useful to decision makers. The Net Present Value method accounts for the time value of money and is more appropriate if the cost of capital needs to be re-invested or if the investment decision has to be made from mutually exclusive projects. O n the other hand, the Internal Rate of Return method, similar to the NPV method, provides a direct realistic comparison with the cost of capital and also can be very helpful when the investment decision can be made on two or more simultaneous projects. The usefulness of the four methods is examined on real investment opportunities that arise in the UK within the renewable energy upcoming industry. For the specific high-risk sector, the IRR method might be more appropriate although this result is by no means a generalisation of the usefulness of the different investment appraisal techniques. Furthermore, the discussion extents to the capital sources that firms use to finance their investments. It is argued that a firmà ¢Ã¢â€š ¬Ã¢â€ž ¢s decision to increase debt capital in its capital structure should be accompanied by the ability to cover the firmsà ¢Ã¢â€š ¬Ã¢â€ž ¢ obligations to creditors. If a firm wishes to maximise the shareholders wealth, then the expected rate of return from investments that are financed with debt capital should not exceed the rate of return expected from investments financed with equity capital, otherwise the firm might face liquidation. References Arnold, G., (2002), Corporate Financial Management, (2nd edit.), Pitman Publishing Arnold, G., and Hatzopoulos, P., (2000), The Theory-Practice Gap in Capital Budgeting: evidence from the United Kingdom, Journal of Business Finance Accounting, 27(5) (6) June/July, p.603-624 Bratton, W., (2003), Corporate Finance: cases and material, (5th edit.), West Group publishing Brealey, R., and Myers, S., (1991), Principles of Corporate Finance, (7th edit.), Higher Education Publishers Dugdale, D., (1991), Is there a à ¢Ã¢â€š ¬Ã…“correctà ¢Ã¢â€š ¬Ã‚  method of investment appraisal, Management Accounting (UK), May, p.46-50 Dugdale, D and Jones, C., (1991), Discordant voices: accountantsà ¢Ã¢â€š ¬Ã¢â€ž ¢ views of investment appraisal, Management Accounting (UK), (November), p.46-50 Lefley, F., (1997), The sometimes overlooked discounted payback method, Management Accounting, vol.75, iss.10, (November), p.36 Lumby, S., and Jones, C., (2003), Corporate Finance: theory and practice, Thomson Publishers NIFES OPET (2000), Local community funds for sustainable energy investment projects: a technical briefing, (retrieved from www.cne-siar.gov.uk on 15/04/2005) Pike, R., (1996), A longitudinal survey on Capital Budgeting, Journal of Business Finance and Accounting, 23(1), (January), p. 79-91 Sangster, A., (1993), Capital Investment Appraisal Techniques: A survey of current usage, Journal of Business Finance and Accounting, vol.20, iss.3, (April), p. 307-333 Watson, D., and Head, A., (2003), Corporate Finance: principles and practice, (3rd edit.), Pitman Publishing 1 Deveraux Deloitte Footnotes [1] This is evident from a number of previous survey studies on what and for what reason firms select their investment appraisal methods. See Arnold Hatzopoulos (2000), Pike (1996) and Sangster (1993) [2] However, a discounted payback method is also available, see Lefley (1997), the analysis of which goes beyond the scope of this essay since this method is not broadly used.