Theme 3

• Forecasting is a time-bound activity, assessing the probable outcome in an area of interest using assumptions about the future state of influencing factors.
• Assumptions are normally based on historic trends, expectations around the future state of the environment and the impact of intended actions to be taken by management.
• A target is an aspiration which allows activities to be determined.
• Time series analysis involves examining figures recorded over time to identify a trend such as seasonal variations, and can be used to predict future sales.
• A mission statement is a qualitative statement of the business' aims.
• An aim is a long-term plan from which the business objectives are determined.
• An objective is a target which must be achieved in order to realise the stated aim.
• A mission statement provides consistency across the business and can attract investors if their values align.
• Mission statements may need to be regularly reviewed in dynamic industries and, if done poorly, can be difficult to measure.
• The payback period of an investment is the length of time it takes for cash flows to cover the initial investment.
• The average rate of return (ARR) of an investment looks at the total return on a project to see if it meets the target return.
• The net present value (NPV) of a project is a discounted cash flow method that looks at the overall value of a project over time.
• • Payback favours a lower value.
  • ARR favours a higher value.
  • NPV favours a higher value
• Investment appraisal allows a business to compare different investments and make decisions about which projects to undertake.
• With investment appraisal methods, qualitative issues must also be considered and poor forecasts may lead to poor decisions.
• Porter argued that differentiation and low cost are the two most effective strategies for firms to gain a competitive advantage.
• A competitive advantage is an advantage over competitors gained by offering customers greater value, either through means of lower prices or greater benefits.
• Porter's Generic Strategy:

  • Broad market, cost advantage: cost leadership
  • Broad market, differentiation advantage: differentiation leadership
  • Narrow market, cost advantage: cost focus
  • Narrow market, differentiation advantage: differentiation focus
• Low-cost operators will likely have high levels of efficiency and will often use lean production methods. They will often use bargaining power to negotiate lower prices from suppliers.
• Differentiation can be achieved through branding and higher-quality products.
• Using a low-cost approach can lead to lower quality products and less flexibility.
• Using a differentiation approach can lead to a high R&D cost and there is less potential for a high volume of sales.
• There are two approaches to decision making: Hunch and Scientific.
• A hunch approach to decision making is based on intuition. It helps the business make decisions quickly but it hard to justify when there is significant risk involved.
• A scientific approach to decision making is based on data analysis. It is more likely to lead to the right decision but is expensive.
• The expected value in a decision tree is the financial value of an outcome calculated by multiplying the estimated financial effect by its probability.
• The net gain in a decision tree is the value to be gained from making a decision.
• A decision tree sets choices out in a logical way so all potential decisions can be considered at the same time. However, it does not take into account external factors and is only built on estimates.
• SWOT analysis helps a business assess its competitive strength and the nature of its external environment.
• SWOT analysis:

  • Internal: Strengths and weaknesses
  • External: Opportunities and threats
• PESTLE analysis:

  • Political
  • Economic
  • Social
  • Technological
  • Legal
  • Environmental
• SWOT analysis benefits a business as it gives a snapshot of how the business is doing and can help the business focus on key strategical issues.
• SWOT analysis can quickly become outdated and it takes time to complete.
• Critical Path Analysis (CPA) is a project management tool that enables businesses to break down a project into a series of steps and identify the ideal order in which to carry out these steps. This makes sure the project is completed in the most efficient and time-effective way possible.
• CPA is beneficial to a business as it shortens the length of time taken to complete a project, improving efficiency.
• CPA can be negatively impacted by inaccurate time predictions and complex projects can be difficult to illustrate.
• Firms may wish to grow to increase their profitability, access economies of scale or to become a market leader.
• Organic growth is expansion that comes from within a business, for example increasing store presence.
• Inorganic growth is expansion that comes from outside of the business, for example mergers and takeovers.
• Organic growth can be funded through means such as borrowing, reinvesting profits or attracting more investments.