Making strategic decisions

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What is Ansoffs Matrix?
A tool developed to help people choose what strategy they should use in order to successfully deveop their product
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What are the areas of Ansoff matrix?
Market penetration, Product development, Market development & Diversification
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What is market penetration?
Concentrating on gaining greater growth in existing markets
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How can market penetration be achieved?
Increasing brand loyalty of consumers so that they use less alternatives & Encourage consumers to increase usage eq instead of selling chips in a medium size pack make large sizes available
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What is market development?
Finding new markets for existing products
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How can market development be achieved?
Repositioning the product to target a different market segment & Move into new markets eg China
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What is product development?
Launching new products into existing markets
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How can product development be achieved?
Changing existing products eq offering new or improved formulas in shampoo, cars adding features to old models and release as new models every year & Developing new products from scratch
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What is diversification?
When a business tries to market new products in absolutely new markets
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Why is diversification beneficial to a business?
It gives the business greater stability as a recession in one market can be buffered by another, and gives a business more room to make riskier decisions which can rear greater rewards
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What is investment appraisal?
The evaluation of an investment project to determine whether or not it is likely to be worthwhile
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What is payback period?
The time taken for a firm to cover its costs
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What is a criterion level?
When the suitable investment is less than 20 months
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What are advantages of the payback method?
Easy to calculate and understand, Takes into account timing of cashflows, Businesses with weak cashflows can seek out quick payback investments
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What are limitations of the payback method?
Ignores what happens after payback period, Ignored the profitability of the project, It has limited use on its own and it doesntpay attention to profits so it is used with the ARR and NPV
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What is the average rate of return?
The profit an investment will give over a period of its lifetime
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How do you calculate the average rate of return?
1. identify profits and initial investment, 2. Divide the profit by the period of its lifetime (in years), 3. Calculate annual profit as a % of the initial investment
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What is the formula for Average rate of return?
(Average annual return / initial investment) x 100
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What is reward for risk?
When the business is taking a risk in order to make profit, the reward for risk is the ARR
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What are advantages of the Average rate of return?
Shows the profitability clearly and allows comparisons with other modes of investment eg interest, Uses all the cash flows over the projects life unlike payback which only considers up until the payback month and Focuses on profitability
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What are limitations of the average rate of return?
Not as accurate as payback as it makes assumptions over a large number of years, ignores the timing of cash flows and ignore the opportunity cost of the money invested
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What does the net present value take into account what the others dont?
The opportunity cost of making an investment
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What are advantages of the net present value?
Takes the opportunity cost of investment into account, A single measure that takes the amount and timing of cash flows into account and Can consider different scenarios
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What are limitations of the net present value?
Complex to calculate and communicate, the meaning of the results is often misunderstood, Only comparable between projects where the initial investment is the same, The rate of discount used is critical, if not accurate business could make a mistake
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What are the parts of a decision tree?
Decision points, Outcomes and expected values
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What are decision points?
The decisions the business has to make
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How are decision points represented?
Boxes
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What are outcomes?
The possible outcomes of taking a decision
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How are the outcomes represented?
Circles
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How are they often obtained?
From back data
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What are expected values?
The financial outcomes of a decision eq how much profit or loss a decision will make
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What are the advantages of decision trees?
Construction of diagrams may highlight decisions that we not previously considered, Putting numeric values on these choices tends to improve results and they force management to take into account the risks involved in making the decisions
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What are the limitations of decision trees?
Much of data including probability is estimated, Only focus on quantitative aspect of decisions, Time consuming, long process = numeric info may be out of date when made, Managers may manipulate the probability of a decision to suit preference
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What is a network path diagram?
Helps to identify the critical path, which shows the activities that require the most careful management scrutiny
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What do lines represent?
An activity
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What is an activity?
The part of the process that requires time and/or resources
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What is a node represented by?
Circles
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What does a node represent?
the start of or end of an activity
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How do you calculate float time?
LFT - ESTW
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What is the node at the EST and LFT?
0
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What are the characteristics of critical path analysis?
The LFT and EST will be equal, it will be the longest past through the nodes
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What does LFT and EST stand for?
Latest Finish Time and Earliest Start Time
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What are advantages of critical path analysis?
Processes should be smoother as there is careful planning involved, Shortens the length of
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Card 2

Front

What are the areas of Ansoff matrix?

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Market penetration, Product development, Market development & Diversification

Card 3

Front

What is market penetration?

Back

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Card 4

Front

How can market penetration be achieved?

Back

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Card 5

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What is market development?

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