Why Businesses Make Bad Investments

Why Businesses Make Bad Investments

Understanding Poor Investment Decisions Year 13 Business Studies AS 91381 (3.3)

What is Business Investment?

Purchase of capital goods to earn future returns Not the same as saving money or buying shares Investment in productive capacity Examples: equipment, factories, IT systems

Types of Business Investment

{"left":"Replace worn-out machinery\nAdd extra production capacity\nSupport new products","right":"Implement IT systems\nComply with regulations\nImprove efficiency"}

Investment Decision Factors

Quantitative factors: cash flows, profits, costs Qualitative factors: reputation, risk, employee impact Economic conditions and market trends Long-term vs short-term considerations

Think About It

Why might a profitable company still make a bad investment decision? What factors beyond profit should businesses consider?

The Role of Interest Rates

Most investments require borrowing money Interest is the cost of borrowing Higher rates = higher borrowing costs Reduced attractiveness of investment projects

Interest Rate Impact Timeline

Common Investment Mistakes

Overestimating future demand Ignoring market research Poor timing of investments Inadequate risk assessment Following competitors blindly

Case Study Analysis

Read the Blockbuster case study Identify 3 key investment mistakes Discuss with a partner Be ready to share findings

Learning from Failure

"The biggest risk is not taking any risk... In a world that's changing quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg

Overestimating Demand

Assuming unlimited market growth Ignoring competitor responses Building excess capacity Example: Dot-com bubble investments

Good vs Bad Investment Timing

{"left":"Investing during economic growth\nResearching market conditions\nPlanning for downturns\nGradual capacity expansion","right":"Investing at market peaks\nIgnoring economic cycles\nPanic-driven decisions\nMassive expansion during uncertainty"}