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AQA A level Business > Unit 7- Analysing the Strategic Position of a Business > Flashcards

Unit 7- Analysing the Strategic Position of a Business Flashcards

1
Q

what does a businesses mission statement aim to do?

A

A business mission statement aims to set out the organisation’s purpose.

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2
Q

what are some influences on a business’ mission statement?

A
  • culture
  • ethos and values
  • shareholders
  • stakeholders
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3
Q

what are corporate objectives?

A

Corporate objectives are overall business objectives designed to steer a business towards achieving its overall mission.

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4
Q

what are some influences on a business’s corporate objectives?

A
  • short-termism
  • business ownership
  • internal business environment
  • external business environments
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5
Q

how does short-termism influence a business’ corporate objectives?

A

Pressures for short-termism, of focussing on short-term gains at the expense of long-term gains, can influence corporate objectives as managers may seek short-term profit at the expense of long-term investment in research and development.

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6
Q

how does business ownership influence a business’ corporate objectives?

A

Business ownership may influence corporate objectives as owners in the private sector are likely to place emphasis on profit maximisation as where public sector organisations are likely to place emphasis on providing for a societal need.

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7
Q

how does the internal business environment influence a business’ corporate objectives?

A

The internal business environment may influence corporate objectives as managers respond to changes in the internal environment.

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8
Q

how does the external business environment influence a business’ corporate objectives?

A

The external business environment may influence corporate objectives as managers respond to changes in the external environment.

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9
Q

what is the difference between strategy and tactics?

A
  • Strategic approaches are long-term plans which require many resources and can be difficult to reverse once implemented.
  • Tactical approaches are short-term plans which often require few resources and can be stopped or reversed if this is required.
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10
Q

what is the link between a mission, corporate objective and strategy?

A
  • A business mission will inform the choice of corporate objectives as corporate objectives will be designed in such a way to meet the overall mission.
  • Businesses can use strategies to work towards their overall corporate objectives.
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11
Q

what is the difference between strategic and functional decisions?

A

Strategic decisions made by businesses will influence departmental or functional decision making as every function within a business must support the overall organisation.

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12
Q

what is a strategic approach Tesco has taken fro growth?

A

Tesco taking over Booker in 2018 is a strategic approach to growth which may require many resources and can be hard to reverse. Booker is a food supplier and merging with Tesco could have provided purchasing economies of scale.

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13
Q

what is a SWOT analysis used for?

A
  • Strengths
  • Weaknesses
  • Opportunities
  • Threats
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14
Q

Draw a SWOT analysis diagram

A

double check using the word document

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15
Q

what are some examples of internal weaknesses?

A

An internal weakness may include cash flow concerns or lower profit margins than others within the industry.

Uber - Weaknesses

There are lots of other taxi-ordering services like Lyft, MyTaxi, Kapten, Hailo etc.
There are lots of other food delivery services like Just Eat and Deliveroo.
Uber is not very profitable. As of 2020, Uber’s net profit margins were below 0%.

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16
Q

what are some examples of external opportunity?

A

An external opportunity may include an expanding market nationally or internationally.

Uber - Opportunities

Uber has already tried to expand internationally with its taxi service, so there is not a growth opportunity there. However:

It already offers taxis and food delivery in the USA, where it has a big market share. It could offer more services, like grocery delivery, or it could create an Uber banking app and give you food & taxi credits on there for using it. Kinda like Venmo or PayPal.
Uber also has a great app with lots of data on traffic and people’s movement. It could offer this to delivery or postal businesses like Royal Mail, Deutsche Post or UPS (in the USA).

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17
Q

what are some examples of external threat?

A

An external threat may include a declining market or increased competition.

Uber - Threats

Businesses that make cars, like Daimler (which owns Mercedes) have invested in taxi-rental apps.
Self-driving (autonomous) cars could mean that Uber’s network of drivers is no longer a big advantage in being able to offer consumers rides or food delivery quickly.

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18
Q

what are some examples of internal strength?

A

An internal strength may include a trusted and reputable brand which is recognised by many.

-Uber - Strengths

A famous brand name. Uber is perceived by most consumers as innovative.
110 million users in the world
69% market share in 2019 in the USA

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19
Q

how can a business’ performance be assessed?

A

using financial ratios
+
using non financial information

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20
Q

what does the return on capital employed calculation (ROCE) allow a business to do?

A

The return on capital employed (ROCE) calculation allows a business to compare operating profit with the total capital employed by the business.

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21
Q

how is ROCE calculated?

A

(operating profit ÷ total capital employed) × 100

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22
Q

how is capital employed calculated?

A

Capital employed can be calculated using: total equity + non-current liabilities.

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23
Q

what does current ratio allow a business to do?

A

The current ratio calculation allows a business to explore its liquidity by comparing current assets with current liabilities.

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24
Q

how is current ratio calculated?

A

Current assets ÷ current liabilities

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25
Q

what does gearing calculation allow a business to do?

A

Gearing calculations can be used to calculate the proportion of long-term funding which comes from debt.

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26
Q

how is gearing calculated?

A

(Non-current liabilities / capital employed) x 100

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27
Q

what does a calculation for payable days allow a business to do?

A

Payables days can be used to calculate the time taken for a business to pay those it owes money to.

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28
Q

how is payable days calculated?

A

(Payables ÷ cost of sales) × 365

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29
Q

whats does a calculation for receivable days allow a business to do?

A

Receivables days can be used to calculate the time taken for a business to collect the money that it is owed.

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30
Q

how is receivable days calculated?

A

(Receivables ÷ revenue) × 365

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31
Q

what are some advantages of using financial ratios to assess the performance of a business?

A
  • Using financial ratios allows a business to compare performance across years.
  • Using financial ratios allows a business to compare its performance to competitors but only if their information is available.
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32
Q

what is a disadvantage of using financial ratios to assess the performance of a business?

A

Using financial ratios does not take into consideration non-financial information such as changes in the external environment.

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33
Q

where does non financial data come from?

A
  • the operations function.
  • the marketing function.
  • the human resources function.
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34
Q

what is the non financial information that is collected from the operations function an how can it be used?

A
  • Labour productivity
  • Capacity and capacity utilisation
  • Quality measures
  • absenteeism rates
  • labour costs
  • labour turnover
  • employee costs
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35
Q

what is the non financial information that is collected from the marketing function an how can it be used?

A
  • Sales forecasts can be used to provide information on a business’ strengths and weaknesses.
  • Brand loyalty and satisfaction data can be used to provide information on a business’ strengths and weaknesses.
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36
Q

how can non financial + financial data be used for comparison and what can it be compared to?

A
  • different departments
  • different years
  • competitors
  • the industry
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37
Q

what are some disadvantages of using non financial information to assess a business’ perfomance?

A
  • Using non-financial information to assess performance may not provide a full overview of business performance.
  • Non-financial information may need to be combined with financial information in order to get an overview of the business’ performance.
  • Using financial and non-financial information to assess business performance may not take into account additional factors such as the business’ impact on the environment, or its employee’s wellbeing.
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38
Q

what is meant by core compentencies?

A

Core competences refer to a business’ ability to combine its skills, knowledge, and processes to provide it with an advantage over competitors, known as competitive advantage.

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39
Q

how do core competencies allow a business to have a competitive advantage?

A

A business’ combination of skills, knowledge and processes will often deliver a unique selling point which is difficult to imitate by competitors.

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40
Q

what are some advantages of core competencies?

A
  • Core competences allow businesses to attract and retain customers, even in a competitive market.
  • Core competences allow businesses to add value throughout their production process.

+For example, Apple’s reputation as an innovative technology manufacturer allows it to add value to the products it creates, as customers are usually happy to pay a higher price for a product associated with the brand.

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41
Q

what are some disadvantages of core competencies?

A

-Outsourcing products can lead to quality issues as some production processes are passed to third parties who may seek to cut costs during production at the expense of quality.

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42
Q

what did Hamlet and Prahalad say about core competence?

A
  • The term ‘core competence’ was first used by Hamel & Prahalad’s 1990 paper.
  • They argued that big businesses should be viewed as a collection of core competences (ability to do stuff), rather than a group of businesses or industries.
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43
Q

what was stated by Rumlet about core competencies?

A

Rumelt (1974) had previously argued that diversified businesses who operated in lots of industries performed better if the same core competences or core activities were shared across all the industries.

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44
Q

what is the aim of Kaplan and Norton’s Balanced Scorecard Model?

A

Kaplan and Norton’s balanced scorecard seeks to provide managers and leaders with a framework with which business performance can be assessed.

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45
Q

draw the Kaplan and Norton’s Balanced Scorecard Model

A

double check the word document

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46
Q

when assessing performance using the balanced scorecard, how is financial performance measured?

A
  • revenue
  • cash flow
  • profit
  • profitablity
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47
Q

when assessing performance using the balanced scorecard, how is customer performance measured?

A
  • brand loyalty
  • customer retention
  • customer satisfaction
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48
Q

when assessing performance using the balanced scorecard, how is internal process performance measured?

A

data about:

  • productivity
  • capacity
  • quality
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49
Q

when assessing performance using the balanced scorecard, how is learning and growth performance measured?

A
  • employee engagement
  • labour turnover
  • retention
  • training and induction provision
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50
Q

why should all 4 factors on the balance scorecard model be taken into consideration when measuring performance of a business?

A

As Kaplan and Norton state that a business must consider its performance in all four of these areas, it is suggested that profit and financial performance alone is not the only measure of business performance which should be considered by managers and leaders.

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51
Q

what are the advantages of the Kaplan and Norton’s balance scorecard?

A

The balanced scorecard provides leaders and managers with a framework to assess and measure the performance of different aspects of the business.

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52
Q

what are the 4 main areas of Kaplan & Norton’s Balanced Scorecard?

A

1-financial performance
2-internal process performance
3-customer performance
4-organisational capacity- learning and growth

53
Q

what does Elkington’s Triple Bottom Line Theory provide us with?

A

Elkington’s Triple Bottom Line theory also provides managers and leaders with a framework to assess business performance based upon the business’ profit, but also on its impact on people and the planet

54
Q

what are the 3 factors in Elkington’s Triple Bottom Line Theory?

A
  • people
  • profit
  • planet
55
Q

explain the business profit element of the Elkington’s Triple Bottom Line Theory?

A

In Elkington’s Triple Bottom Line, the business’ profit is considered as an important element of determining the business’ overall performance; however Elkington states that such profit should also be used to support the community.

56
Q

explain the business impact on the people element of the Elkington’s Triple Bottom Line Theory?

A

In Elkington’s Triple Bottom Line, the business’ profit is considered as an important element of determining the business’ overall performance; however Elkington states that such profit should also be used to support the community.

57
Q

explain the business impact on the planet element of the Elkington’s Triple Bottom Line Theory?

A

In Elkington’s Triple Bottom Line, the business’ impact on the planet is considered as an important element of determining the business’ overall performance.

58
Q

Assess the usefulness of break-even analysis when making decisions as a new business.
Explain the break-even point

A

The break-even point states how many products a business must sell so that the revenue it generates covers its’ cost
costs. At the break-even point, the business does not make a profit or a loss. A business only makes a profit if it sells more than this number of units. Often, a new business’ aim is to survive and to do this the business should be trying to sell enough products to meet the break-even point.

59
Q

Assess the usefulness of break-even analysis when making decisions as a new business.
Argument that it is useful

A

This suggests that break-even analysis is useful for businesses who have the goal of survival. Break-even can also be used to conduct ‘what if’ analysis. The owner of the business could manipulate the inputs to the breakeven calculation to see the impact of the changes on the break-even point. For example, when deciding which property to rent, the fixed cost value could be changed to see the break-even point in different locations/premises. Alternatively, when deciding what price to charge, this analysis tool could be used, alongside market research, to again see how many products would need to be sold. A new business may not have this data, so making decisions with the aim of reaching
breakeven can be helpful.

60
Q

Assess the usefulness of break-even analysis when making decisions as a new business.
Argument that it is useless

A

One significant assumption of the break-even analysis is that the selling price remains constant and all products are sold at the same price. If a business sells a product at a discount or uses promotional techniques such as BOGOF (buy one get one free), then the number of units that need to be sold will be different to the analysis. A new business needs to attract customers and, in order to do this, they may use promotional techniques such as BOGOF, money off first spend vouchers, or free samples to entice customers. During the first few weeks or months, the owner can gather data on the success of their products. As a result of this they may wish to modify the pricing. Break-even analysis cannot account for the complexities of operating as a responsive business and this reduces the usefulness of the tool.

61
Q

explain the impact of political and legal changes on a business

A
  • Political and legal changes can present businesses with opportunities and threats.
  • Political and legal changes can affect decision making at the corporate level and functional or departmental level.
  • For example, the introduction of the National Living Wage presented a threat for many businesses as total costs increased.
62
Q

how does the legal environment affect decision making?

A
  • Legislation about competition and competitive practices can affect a business. Competition laws ban businesses from acquiring or taking over other businesses if competition will be substantially reduced.
  • Legislation about employment regulations can affect a business. Working time regulations and the equality act state provisions a business must make for supporting and protecting employees.
  • Legislation related to environmental protection can affect a business. Laws around pollution provide guidance in terms of the pollution created by businesses and these laws must be complied with.
63
Q

how does the political environment affect decision making?

A
  • Enterprise is a political factor which involves national and local schemes to support new, start-up businesses.
  • Regulators exist to ensure businesses are following industry rules so that consumers are not taken advantage of. Infrastructure is a political factor and relates to the transport systems and communications networks used to support trade and supply.
  • International trade is a political factor and refers to the trading of goods and services internationally.
64
Q

what are some factors in the economic environment which can affect a business’ strategic and functional decision making?

A
  • Gross domestic product (GDP)
  • taxation
  • exchange rates
  • inflation
  • government policies
  • trade
65
Q

how does GDP affect a business’ strategic and functional decision making?

A
  • Gross Domestic Product (GDP) is the value of goods and services produced by a country during a certain period.
  • Changes in GDP can affect a business’ decision making as GDP growth is likely to coincide with an increase in demand which businesses must respond to.
66
Q

how does taxation affect a business’ strategic and functional decision making?

A

-Taxation refers to the tax paid by businesses on any profits made.

-Changes in taxation can affect a business’ decision making. For example, increased taxation will reduce profit after tax which can affect strategic investment decisions.
I
-f there is less money left over to invest, then the business is likely to have to prioritise better.

67
Q

how does exchange rates affect a business’ strategic and functional decision making?

A
  • Exchange rates are the value of one currency expressed in terms of another currency.
  • Changes in the exchange rate can affect the decision-making process of a business which imports from or exports to a country with a different currency.
Strong
Pound
Imports
Cheaper
Exports
Dearer
68
Q

how does inflation affect a business’ strategic and functional decision making?

A
  • Inflation refers to the general increase in price levels and the reduction in the real value of money.
  • Changes in inflation can affect the decision-making process of a business because rising costs may mean that a business has to increase its prices to maintain its profits at the same level.
69
Q

what is meant by government policies?

A

fiscal policy and monetary policy

70
Q

what is the difference between fiscal and monetary policiy?

A

-fiscal policy refers to the use of government expenditure and taxation to influence demand
WHERAS
-monetary policy refers to the controlling of money supply and interest rates to control economic activity

=Changes in government expenditure and taxation can increase or decrease demand which businesses may need to respond to.
=Increasing interest rates may affect business decision making as consumers may increase their savings and therefore decrease spending which can affect demand for a business’ products.

71
Q

what is meant by open trade and protectionism and what does it cause?

A

Open trade and protectionism refer to the ability of countries to trade either with or without barriers to trade.

-Protectionist measures can reduce international trade which can affect a business importing and exporting goods and services.

72
Q

what is meant by globalisation?

A

Globalisation is the increasing trend for individual markets to become unified and worldwide.

73
Q

what is an advantage of globalisation?

A

Globalisation offers businesses opportunities to expand and target international markets.

74
Q

what is a disadvantage of globalisation?

A

Globalisation increases competition for local businesses and this can reduce market share and sales revenue.

75
Q

what are some advantages of targeting emerging economies?

A
  • Targeting emerging economies can help a business to extend the product life cycle for its goods and services.
  • Emerging economies offer business new markets to target which can increase sales volume.
  • Emerging economies offer businesses increased access to labour resources often at a reduced cost compared to the labour market in the business’ home country.
76
Q

what do transnational corporations do?

A

Aside from global production networks, Transnational Corporations help globalisation to spread and also take advantage of the economic liberalisation that has come with globalisation.

77
Q

what is the breakdown of the word glocalisation?

A

combination of globalisation and localization

78
Q

what do TNCs use glocalisation for?

A

TNCs use glocalisation to help spread globalisation. This means that they adapt their products to the needs of local consumers.
For example, lots of global food TNCs offer a different menu in India where beef is not eaten.

79
Q

what is a factor that must be taken into consideration for glocaisation?

A

the different laws in different countries

80
Q

why is the development of new markets a good thing for glocalisation?

A
  • TNCs use the development of new markets to benefit from glocalisation.
  • As countries develop and their populations have higher disposable incomes to spend on ‘luxury’ items, TNCs are able to access new markets and sell their products in these countries.
81
Q

what is meant by trade liberisation?

A

Trade liberalisation involves a country lowering import tariffs and relaxing import quotas and other forms of protectionism.

82
Q

how do TNCs take advantage of trade liberalisation?

A

They take advantage of the removal of barriers to trade to earn more profit and increase their market share.

83
Q

how do TNCs use outsourcing and offshoring?

A

TNCs use outsourcing and offshoring to make sure that they are able to maximise their profits by minimising the costs of producing their goods.

84
Q

how can world trade be examined?

A

World trade can be examined by looking at trade for a manufactured good (e.g. cars) and trade for a food commodity (e.g. bananas).

85
Q

explain interest rates

A

Interest can either be charged on consumers’ borrowing on things like mortgages, or it can be earned on savings held with banks. People with more savings want high interest rates so that they earn more interest on their savings. Whereas, borrowers want lower rates as this reduces the interest that they have to pay to the financial institutions that have lent them money.

86
Q

Explain interest rates in the UK

A

In the UK, the Bank of England uses monetary policy to control inflation and stabilise the UK’s economy. One of the main tools it uses is the Bank Rate, which is the interest rate that the Bank of England offers to financial institutions. This rate affects the rate that financial institutions (banks) then offer to the public. When interest rates are low, people spend more and the opposite is true when rates are increased.

87
Q

Analysis for individuals who are saving

A

When interest rates decrease, people with savings receive a smaller reward for saving. Therefore, the incentive to save money is lower. This is particularly true if the interest rate is lower than inflation. If inflation is higher than interest rates, the amount of real goods that one can buy with their savings falls over time. As a result, low interest rates encourage people to spend their disposable income. There will be increased demand for luxury goods, such as Mercedes cars, during this time.

88
Q

Analysis for individuals who are borrowing

A

Low interest rates allow consumers to borrow money and pay back a relatively small charge. This makes credit more affordable. This can make people feel wealthier. For luxury businesses, this is positive as consumers are more likely to spend money. The car industry promotes using credit when buying a car. So lower interest rates makes buying a car more affordable because interest payments will be lower. Therefore, not only are consumers more inclined to purchase a car, they are likely to purchase a more extravagant brand.

89
Q

evaluate interest rates

A

Reducing interest rates will have a positive impact on Mercedes sales and on Daimler. Regardless of an individual’s circumstances, low interest rates encourage people to spend their disposable income and even take out more credit. During periods of low interest and high consumer confidence, consumers feel increased wealth and are more likely to splash out on non-essential luxury goods, such as cars.

90
Q

what is meant by urbanisation and what is the reason for it?

A
  • Urbanisation describes people moving from rural areas to urban areas.
  • People usually move to urban areas because there are more job opportunities there.
91
Q

what is meant by migration?

A

Migration describes people moving from one country to another, with the intention of residing and accessing employment.

92
Q

when do consumer lifestyle changes occur?

A

Consumer lifestyle changes occur when buying habits or spending patterns change.

93
Q

what do social changes include?

A

Social changes can include the growth of e-commerce and the changes in buying habits as people begin to expect the availability of e-commerce platforms to complete online transactions.

94
Q

what is the impact of the ageing population

A

The UK’s population is ageing, and as healthcare improves and people live longer, demand for products and services can change.

95
Q

what is the impact of rising birth rates on market share?

A
  • The UK’s population is expanding as birth rates continue to increase.
  • An expanding population will increase demand for products and services and businesses must be able to respond to these increases to maintain market share.
96
Q

what does it mean for a business whose customers are taking advantage of e- commerce?

A

As consumers take advantage of advancements in e-commerce, demand for online shopping will increase and businesses must be responsive to these changes.

97
Q

what does the growth of social media mean for a business?

A

As social media use continues to grow, businesses must adapt customer service procedures to reflect changes in consumer expectations.

98
Q

what is meant by Corporate Social Responsibility (CSR)?

A

Corporate social responsibility, known as CSR, is a term used to describe an approach whereby businesses seek to exceed basic legal requirements by considering their impact on society.

99
Q

what are some things that a business focussing on their social responsibility may seek to satisfy?

A
  • satisfying employees
  • satisfying customers
  • satisfying shareholders
  • satisfying suppliers
  • satisfying the community
100
Q

what is an advantage of CSR?

A

CSR, though initially increases costs, can attract customers to the business and increase market share and sales revenue in the long-term.

101
Q

what is a disadvantage of CSR?

A

CSR can increase a business’ costs through paying for initiatives, offering employees fair wages and agreeing to pay suppliers fair prices.

102
Q

when is Carroll’s Social Responsibility Pyramid used for?

A

To support businesses wishing to fulfil their social responsibilities, Carroll’s Corporate Social Responsibility pyramid can be used by managers and leaders.

103
Q

name the 1st, 2nd, 3rd and 4th responsibilities?

A

1- economic
2- legal
3- ethical
4- philanthropic

104
Q

explain the first responsibility of a business using the carroll’s corporate social responsibility pyramid

A

The first responsibility a business should fulfil is its economic responsibility; being profitable is the foundation of the hierarchy and allows the business to move through additional responsibilities.

105
Q

explain the second responsibility of a business using the carroll’s corporate social responsibility pyramid

A

The second responsibility a business should fulfil is its legal responsibilities, for example, paying employees the national minimum wage.

106
Q

explain the third responsibility of a business using the carroll’s corporate social responsibility pyramid

A

The third responsibility a business should fulfil is its ethical responsibilities; ethical responsibilities see a business making moral decisions such as, for example, agreeing to pay employees more than the legal requirement in order to support their standard of living.

107
Q

explain the fourth responsibility of a business using the carroll’s corporate social responsibility pyramid

A

The final responsibility a business should fulfil is its philanthropic responsibilities; here the business supports society and the community through, for example, supporting charitable events and sponsoring public facilities.

108
Q

what is meant by the shareholder concept?

A

The shareholder concept states that businesses have a responsibility only to raise value for shareholders through increasing share prices and paying dividends and that profit maximisation is the only focus of the business.

109
Q

what is meant by stakeholder concept?

A

The stakeholder concept states that as well as satisfying shareholders’ needs, the business must place equal emphasis on satisfying the needs of all other stakeholders, including employees, customers and suppliers.

110
Q

what is the aim of porters 5 forces?

A

Porter’s five forces is a model that allows you to analyse the competitiveness of a business environment. The 5 forces model presents five different forces impacting the competitiveness of a business environment

111
Q

what are porters 5 impacting the competitiveness of a business environment?

A
  • barriers to entry
  • buyers’ bargaining power
  • threat of substitutes
  • suppliers’ bargaining power
  • rivalry between existing competition
112
Q

explain bargaining power of suppliers

A

The bargaining power of suppliers relates to how much power suppliers in the market have. If suppliers have more power, the market may be less attractive, as suppliers can charge higher prices.

113
Q

explain bargaining power of buyers

A

The bargaining power of buyers relates to how much power buyers in the market have. If buyers have more power, the market may be less attractive, as buyers can demand a lower price.

114
Q

explain barriers to entry

A

Barriers to entry relate to how easy it is for a new business to enter the market. If barriers to entry are low, the market will be more competitive as new businesses are likely to enter.

115
Q

explain what is meant by threat of substitutes in porters 5 forces

A

The threat of substitutes relates to whether customers are likely to buy an alternative product. If this threat is high, the market is less attractive, as customers are more likely to shop elsewhere.

116
Q

explain what is meant by rivalry in porters 5 forces

A

Rivalry amongst existing competitors refers to how much competition currently exists within the market. The greater the competition, the less attractive the market may be to other businesses.

117
Q

what are some advantages of porter’s 5 forces?

A
  • Porter’s five forces model allows businesses to understand the competitiveness of a market and make decisions about their own competitiveness.
  • Porter’s five forces model allows new entrants to consider how profitable a market may be.
  • t is a good framework to identify strengths, weaknesses, opportunities and threats.
  • It provides a checklist for thinking through what matters for a business.
  • It is useful for big businesses that are at the top of an industry, but not for tiny businesses. It is only good for big businesses because they can affect the 5 Forces
118
Q

what are the benefits of investment appraisal

A
  • Investment appraisal allows a business to work out whether an investment is profitable enough, or whether it pays back quickly enough.
  • Investment appraisal also allows a business to compare one project with another project and decide which project is the most suitable for the business’ needs.
119
Q

what are the risks of investment?

A
  • Investments carry risk for businesses as all i
  • Investments require a financial commitment.
  • Investments involve taking risks in the hope of a possible reward, or profit.

Investment appraisal allows businesses to decide whether any potential return is worth the risk associated with an investment.

120
Q

what is meant by investment appraisal?

A

Investment appraisal refers to the process of appraising or working out, whether an investment is likely to meet the business’ project objectives.

121
Q

what information is needed for investment appraisal?

A
  • Businesses need to gather as much information as possible about any investments they are considering.
  • Investment appraisal includes three techniques which provide a business with different information about any potential investment:

=Net Present Value.
=Average Rate of Return.
=Payback.

122
Q

how is Net present value (NPV) expressed?

A

Net Present Value is expressed using a real value in pounds and pence.

123
Q

what is the difference between a negative and positive NPV?

A

A negative NPV suggests that a project will not make a business any money whereas a positive NPV suggests that a project will produce a return for the business.

124
Q

how is average rate of return (ARR? calculated?

A

(Average net return ÷ investment) × 100

125
Q

what does a higher ARR suggest?

A

The higher the ARR percentage, the higher the project return in comparison to the original investment.

126
Q

what do we use ARR data?

A

The ARR can be used to compare the project with other projects, including investing the money in a bank account and accruing interest.

127
Q

what is meant by payback?

A

Payback is expressed as a period of time. It is the amount of time for cash flow to be equal to the initial cost of a project.

128
Q

what does a shorter payback mean for a business?

A

The shorter the payback, the quicker the business recovers its original investment.

129
Q

what is payback period used for?

A

The payback period can be used to compare the project with other projects and businesses with liquidity concerns may choose a project with the quickest payback.

AQA A level Business (13 decks)

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