Integrated communication is a strategic management system which is concerned with overseeing all messages sent by the organization and which have a purpose to develop a long-term and profitable relationship with all the organization’s stakeholders (internal and external).

Therefore, integrated communication is a broader concept and public relations is just one of the elements which is required for the success of integrated communication as a strategic management process of the organization.

Integrated communication concept evolved over time and developed into a full-blown strategic management process which focuses on two-way communication (dialogue with stakeholders) as apposed to one way communication (monologue).

Contemporary integrated communication processes within an organization focuses on all stakeholders. This is in comparison to earlier efforts when focus was only on customers.

Further, whereas before focus was on transactions, now the focus is on the relationship with stakeholders. A successful integrated communication process requires integration and collaboration of all functions. It is across-functions rather than a functional process. Contemporary integrated communication process is also very data driven since data enhances the performance of the process.

 

Effective promotion can be achieved via diversity of promotional methods. A mixture of promotional techniques is called a “promotional mix”.

Promotional mix, which is also referred to as promotional tools, consists of sales promotion, advertising, sponsorships, direct marketing, personal selling and public relations (publicity).

Sales promotion – refers to enhancing demand for the product or service by providing adequate short-term incentives to entice potential and current customers and distribution channels to purchase the product or service. It also can build awareness of the business’s existence and create goodwill.

Sales promotion basically includes any effort, other than advertising and personal selling, to persuade potential or current customer to purchase a product or service. An example of sales promotion can be a gift offered by manufacturer with the purchase of beauty products over a certain amount, such as over $35. Such promotions are regularly conducted for many brands such as beauty products Lancôme and Clinique. However, this strategy should be used with caution to ensure that value of the brand is maintained. Excessive use of promotions may be damaging for the brand.

Another example of usage of sales promotions is a company’s specialties (novelty items). Specialties refer to functional items such as calendars, shirts, pens, coffee mugs with the company’s name or slogan that are given as a gift to potential and current customers. Specialties help to continuously remind receivers of specialties about the company’s existence.

Advertising – Advertising refers to any paid and non-personal marketing communication in the mass media. Mass media may include television, magazines, newspapers, radio and cinema. Advertising assists in building awareness about the product or service offered as well as establishing confidence in the potential customers regarding reliability and attractiveness of the products and services.

The goal of the advertising is to entice potential and current customers to purchase products or services. To be effective, advertising must be for high quality products or services that meet real customers’ needs. Advertising for inadequate and low quality products or services, the purchase of which results in unsatisfied customers, can only work in the short-term. Advertising must be just a complement for a high quality and useful product or service.

Two types of advertising exist, product or service advertising and institutional advertising. Product or service advertising have a goal of enticing customers to purchase products or services of the business by promoting advantages that products offer as well as how the product can be used to meet customers’ needs. Institutional advertising builds awareness about company and confidence in potential and current customers with regards to the reliability and value adding aspects of the company and its products and services. Advertising can also be a combination of product or service and institutional advertising.

Advertising can be expensive. Management have to make sure that the return on investment in advertising is greater than cost of advertising by an acceptable amount.

Advertising, like other elements of the promotional mix, sometimes may need to be supplemented by other elements of the promotional mix such as personal selling. This may be necessary to “close the sale” since consumers may still have doubts regarding the purchase of the product or service offered.

Personal selling, however, is generally even more expensive than advertising. However, if the remuneration of sales people is mainly on a commission basis than personal selling is better for the cash flow position of a business compared to advertising. This is because, in the case of personal selling, cash outflow occurs only when sale is made compared to advertising where cash outflow occurs prior to closure of sales.

Sponsorships – Sponsorships refer to organisations providing support for an activity or event in the form of monetary or other resources with the intention to obtain recognition for support via publicity or advertising.

Direct marketing – focuses on obtaining an immediate response.

Personal selling – Personal selling refers to oral face to face (one to one) marketing communication with potential buyers. The goal of personal selling is to complete a sale as well as to build sustainable business relationships with the customer to ensure future sales.

To ensure effective personal selling, the sales person must have adequate knowledge of product or service. The sales person must also be presentable personally which can be achieved with professional dressing, grooming and friendly communication style. The sales person must be enthusiastic, friendly, be sincere, with best interests of customer in mind and be focused on a win-win rather than win-lose solution.

To identify new potential customers that can be persuaded to purchase products and services via personal selling, prospecting is often used. Prospecting refers to the systematic process of identification of potential customers.

Public relations (PR) – public relations refers to the activity of managing relationships with the media and obtaining positive reference concerning the business in the media, such as newspapers or magazines, without directly paying for such exposure. Such exposure (increased visibility) without directly paying for it is called publicity.

Publicity (PR) is a cost effective way to get exposure in the media. It helps to build awareness about the business. It also assists in enhancing customer confidence since customers may trust publicity more than they trust advertisements.

However, the negative aspect of publicity involves lack of control over what will be written or said about the enterprise. Therefore, occasionally negative publicity may occur, which may be harmful to the enterprise. Skilful handling of negative publicity is one of the goals and responsibilities of an effective public relations function.

All the above elements of the promotional mix are closely interconnected. The following example will illustrate this point. Assume the following situation. An individual may see an advertisement of the product in a magazine. A few days later a potential consumer may see mention regarding the company, that produces the earlier advertised product, in the newspaper (publicity). The mention may be regarding this company providing support for an activity that the individual considers to be worthy (sponsorship).

A day later the potential consumer receives a direct mail from the earlier mentioned company providing information regarding an upcoming promotion for the earlier advertised product (direct marketing).

A week later, when passing the product in the store, the potential customer may see that the information in the direct mail was correct and a special promotional free gift is available with the purchase of a product within that particular week (sales promotion).

However, at this point, the individual may still have questions or not be sure about the appropriateness of the purchase. Personal selling may be further required to answer potential customer’s questions and to highlight and summarize the benefits of the product.

Personal selling may also help to build relationships with the potential consumer so that ongoing sales may become more likely. Only than the sale is closed and a potential customer becomes an existing customer.

The above example clearly illustrates how a combination of all the elements in the promotional mix was essential to attract this particular customer to finally make the purchase. Each element of the promotional mix on its own may have not been adequate to entice this particular customer to purchase a product.

 

Promotion

Promotion is one of the four Ps of the marketing mix. Promotion is interrelated with other 3 Ps of the marketing mix. Overall, each of the 4 Ps of marketing mix is vital for successful performance of the business.

Promotion, as an element of the marketing mix, entails marketing communication with the target market. Communication can be personal (face to face) and non-personal (not face to face). The objective of marketing communication is to attract customers to purchase a company’s products and services.

Promotion is an important element of the marketing mix because there is a significant amount of products and services available to the population. Therefore, the organization needs to educate, communicate to and persuade its target customers why it’s particular product or service will meet customers’ needs.

SMCR model

Promotion is a form of communication. The SMCR framework is a generally accepted model for communication. SMCR stands for a source (a sender), a message, a channel and a receiver.

In the SMCR model, a source encodes the message and transmits it to the receiver via a communication channel. A communication channel is a medium that allows for the message to be transmitted to the receiver. Communication channels may include television, radio, magazine, face to face communication or telephone communication.

A receiver, hopefully, is able to decode the message accurately, understand it and act upon it (if action is required). If communication allows for feedback from the receiver to the source (sender), then the source may adjust the message for better decoding by the receiver. This improves the efficiency of communication.

Various factors distort the message at the same time as it is transmitted from source to the receiver. Such factors are called “noise”. Due to “noise” and inability of the receiver to decode the message accurately, the meaning that the receiver ultimately attributes to the message may be much distorted from the original meaning of the source.

In the case of promotion, a source is the company. A message is what the organization is trying to communicate to the target market (a receiver). A channel of communication refers to different channels that the organization can use to communicate its message such as television and newspapers.

Overall, if the organizational message received by the target audience is accurately decoded and results in intended actions, then the promotion was successful.

 

New product development (NPD) refers to the formal process of developing new products. New product development (NPV) can be seen as an additional stage of the product life cycle which takes place before the introduction stage of the product life cycle.

The new product development (NPD) process can consist of the following phases:

Idea generation – This stage consists of a search for ideas on potential new products from various internal and external sources. Such sources can include looking at which products are offered by competitors, which patents can be utilized, running focus groups with potential customers, recommendations of enterprise’s personnel, trade shows, ideas generated from marketing research and requests or suggestions from customers.

Brainstorming is one of the common tools used for idea generation from creative thinkers. Such individuals may be identified internally within organizations. However, in some cases, external individuals such as experts in the field may be invited to participate in the brainstorming session. Brainstorming usually leads to one idea being the trigger for another idea and so forth. This way, a large pool of diverse and often “outside the box” ideas can be generated during the session.

Idea evaluation – Once a good pool of ideas is developed, the critical evaluation of ideas should be undertaken to determine its potential and prospective profitability. This will allow elimination of unsound and unprofitable ideas. If a large pool of ideas was generated during the idea generation phase than screening of ideas may be done in rounds with successive elimination of ideas by using more and more sophisticated techniques until only the list of most promising ideas is generated.

Development and testing of the concept occurs in this stage which involves further screening of the most promising ideas. Focus groups are often used to obtain feedback from potential customers to estimate customers’ tastes, potential demand, frequency of purchases and pricing.

Then a business analysis is conducted to evaluate the two or three most promising ideas. Business analysis consists of market research to further screen ideas with regard to financial considerations. Estimations of forecasted demand, production costs, marketing costs, sales and profitability are undertaken.

Development of the product – This phase includes actual design and development of the products. This phase may involve developing the actual prototype of the product, development of the marketing plan and packaging for the new product. At this stage focus groups are often used to obtain feedback from the potential customers. If results from the feedback are unsatisfactory, then adjustments can be made to the marketing mix to ensure more encouraging market acceptance of the product.

Testing of the product – After the product is successfully developed, it should be tested. Besides testing the new product to ensure it is functional, some testing should also be undertaken to research the probable reaction of the market. Sometimes a product is launched on the small scale, for example only in one city, before it is launched on a larger scale such as nationally or internationally.

Commercialization – This stage coincides with introductory stage of the product life cycle and includes the actual introduction of the product to the market on a large scale.

After the five steps of the New product development (NPD) process is completed and the product is successfully commercialized, companies need to monitor the products performance and adjust it to potential changes in the market such as changes in consumer tastes, new and more advanced alternatives introduced to the market which may make product obsolete, technological developments which allow for significant enhancements of the product’s functionality, new domestic and foreign competitors and domestic and global economic conditions.

Sometimes the new product development (NPD) process is presented in 7 steps where the idea evaluation phase is split into 3 steps namely screening, development and testing of the concept and business analysis which we grouped under one heading of idea evaluation.

Developing a total product offering

After product is developed, other components of the total product offering should be developed before the product will be ready to be introduced to the market. Other components of the total product offering may include branding, packaging, labelling and warranty.

Branding

According to the American Marketing Association (AMA), a brand is a “name, term, sign, symbol or design, or a combination of them intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of other sellers”. Therefore, branding is a way that allows for products or services of an enterprise to be identified by customers.

Brand identity consists of the brand name, brand image and brand mark.

 

Book value per share is a value that common stock holders would have received if all assets of the firm were sold for its accounting value and if all liabilities were settled and residual value divided among common stock holders.

In other words, it is a book value of the firm (the net worth of the company, which is assets minus liabilities) divided by the number of shares of common stock outstanding.

The following formula used to calculate book value per share:

Book value per share = TA-TL/Number of shares of common stock outstanding  

Where TA is Total Assets and TL is total liabilities.

 

This method is criticized because it relies on historical data and does not take into account the future expected earnings of the firm. Therefore, it does not reflect the real market value of the firm.

Return on total assets (ROA) is also called return on investment (ROI). It refers to how effective is management in generating returns on assets of the firm.

Return on assets (ROA) or return on investment (ROI) = Earnings available for common stockholders/Total assets

For example, if ABC’s total assets are $3,500,000 and earnings available for common stockholders is $400,000 than

ROA or ROI=400,000/3,500,000

ROA or ROI=0.11

This means that for every dollar of assets, ABC earned 11 cents. The more the firm earns on every dollar of assets the better.

Perking order theory provides additional explanation to optimal capital structure. In short, it states that firms prefer to follow hierarchy of financing. This also referred to as perking order. The preferred order is retained earnings, debt and equity. The internal source of finance (retained earnings) is the most preferred source because it does not involve flotation costs and does not require a disclosure of proprietary financial information. This is followed by external sources, which have debt as preferable external source, followed by equity (preferred stock and than common stock).

Asymmetric information may be the reason why hierarchy of financing is generally preferred over target capital structure maintenance. Asymmetric information refers to the chance that management knows more about current real performance of the firm and future growth projections versus outside investors.

Typically management is expected to have an objective of maximizing shareholders value. And, in such case, as proposed by Steward C. Myers in 1984, asymmetric information could be the reason for the fact that financial managers tend to prefer a hierarchy of financing as opposed to target capital structure maintenance, when making financing decisions.

If management have an opportunity for a worthwhile investment and uses debt as a source of financing, investors typically see it as a signal that management believes that stock is under priced. This leads to increase in value of the stock. This also leads to existing stockholders benefiting from full increase in value. Existing stockholders don’t have to share increase in value with new stockholders.

However, if management issues new stock, investors generally see it as a signal that management believes that stock is over priced and that management believes that current performance and prospects of the firm is seen better by the market than it is in reality (and as known by the management). This leads to decrease in value of the stock. Flotation costs together with decrease in value of stock are variables that contribute to high cost of new stock issue as a source of financing.

Given above, it makes sense for firms to keep low levels of debt. This will allow firms to use debt as a source of financing when good investment opportunity arises but stock is believed by management to be under priced.

If debt level does not allow further borrowing, management will be in unfortunate position. Issuing of new stock will send the wrong signal to the market (that stock is over priced). This will further decrease the value of already believed to be under priced stock.

Two surveys were conducted, one with Fortune 500 companies and another with large OTC (over-the-counter) companies, which support pecking order theory. Both surveys point out that, in practice, financial managers seem to prefer hierarchy of financing to target capital structure maintenance when making financing decisions.

Results of the surveys presented below:

Authors of surveys	Surveys	Percentage of responders who prefer using target capital structure when making financing decisions	Percentage of responders who prefer using hierarchy of financing when making financing decisions
J.M.Pinegar and L.Wilbricht	Fortune 500 Firms	31%	69%
L.C.Hittle, K.Haddad and L.J.Gitman	Large OTC Firms	11%	89%

Related Articles:

• Capital Structure Decisions
• Capital structure decisions analysis with debt ratios
• Optimal capital structure
• EBIT-EPS Capital Structure Approach

 

 

 

 

 

 

 

 

Break-even analysis or cost-volume-profit analysis (CVP) refer to calculating a level at which total revenue is equal to total cost.

Operating break-even point refers to the sales level at which all operating costs are covered and at which point operating profit (EBIT) equals zero.

To find operating break-even point we need to follow the formula:

Q=FC/P-VC

Where:

Q – is operating break-even point (in units)

FC – is fixed cost

P – is price

VC – is variable cost.

Fixed costs refer to costs which do not change as volume of sales changes. For example, assume that enterprise is renting a building. The rent paid is a fixed cost since it does not fluctuate with changes in sales volume. Even if company will not sale any products over certain period, the rent still will have to be paid.

Variable costs, on the other hand, refer to costs which fluctuate with changes in sales volume. An example of variable cost is commission paid to sales personnel. For example, assume that business sales product at $100 per unit and pays sales commission of $5 to its sales personnel. The sales commission is a variable cost since it will fluctuate with changes in sales volume.

Test yourself:

Assume that ABC’s fixed cost is $800,000. The company manufactures only one product with price per unit of $25 and variable cost per unit of $15. What is the amount of units that company need to manufacture to have just enough income to cover its operating costs?

Solution:

Q=800,000/25-15

Q=80,000 units

Therefore, ABC needs to manufacture 80,000 units to break even

Test yourself:

ABC company produce only one product with sales price per unit of $15. Its fixed cost is $3,800 and its variable cost is $8. Find operating break-even point.

Solution:

Follow the formula Q=FC/P-VC.

Q=3,800/15-8

Q=543 units

This means that at 543 units, ABC’s operating profit will be zero. At any amount of units above 543 the company will have positive operating profit (above zero). At any point below 543 units the company will have negative operating profit (below zero, which we can also call a loss).

To find overall break-even point, we need to find sales level at which all the costs are covered.

 

 

 

Breakpoint

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Related to the Weighted Marginal Cost of Capital (WMCC) concept is the break point concept. Break point is the amount of total financing at which the cost of one of the components of total financing escalates. At such point WMCC also increases. Calculation of the break point is required for calculation of the weighted marginal cost of capital (WMCC).

For example, if a business used up all retained earnings to issue common stock and it still requires more financing, it may issue new common stock. The cost of new common stock is higher due to under pricing and flotation costs. Therefore, the cost of one of the financing components rises and consequently WACC also rises and WMCC also escalates. The point at which the cost of one of the components rises is called the break point.

To find a break point for a particular financing source, we need to take the amount of funds available from the financing source at a given cost and divide it by the capital structure weight for the financing source.

Break Point = funds from the financing source/capital structure weight.

Example

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Assume that when the business uses up $100,000 of its long-term debt at a cost of 7%, it can only use long-term debt at a cost of 10%. The weight of a long-term debt as a source of capital in the company’s capital structure is 40%. To find the break point we take $100,000 and divide it by 0.4. We end up with $250,000, which is a break point.

Test yourself

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ABC Corporation has a long-term debt weight of 35% and the equity weight of 65% in the capital structure. The business has $400,000 of retained earnings left at a cost of 12%. Thereafter, they can issue new common stock at a cost of 17%. ABC can use long-term debt as a source of financing up to the amount of $200,000 at 8% and thereafter at 10%.

REQUIRED: What are the break points for debt and equity?

SOLUTION:

Debt break point:

200,000/.35=$571,428.65

Equity break point:

400,000/.65=$615,384.6

Therefore, at total new funding levels of $571,428.65 and $615,384.6 the WMCC will shift upward.

Related articles: Weighted average cost of capital (WACC), Weighted Marginal Cost of Capital

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