sample-12-cuegis-essay.pdf

Incorporated in 2008, Minsheng Financial Leasing Co. (Minsheng) total assets have grown to be valued at over RMB 110 billion. Minsheng seeks to position itself as a premium private jet leasing firm by providing new and luxurious aircrafts that are fuel efficient. Minsheng&rsquo;s strategic vision is to become the best private leasing company in China and Asia by creating brand awareness and becoming a globally competitive leasing company. Minsheng&rsquo;s organic growth strategy refers to the company&rsquo;s expansion by using its internal resources and funds with a long term aim to increase their scale of its business operations and revenue. This provides value for money for its business customers.

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However, Minsheng needs to ensure profitability and good returns from investment for its shareholders. According to the latest available annual reports, although the Chairman, Dong Wenbiao and Vice-chairman Hong Qi received around RMB $4 million, the cash dividend payout ratio has fallen by almost 50%. The Chairman is under great pressure to ensure greater profitability for Minsheng and higher returns to shareholders through its expansion strategy. In this aspect, investment appraisal plays an important role in evaluating strategies. Investment appraisal refers to numerical methods used to analyze the financial costs and revenues from the acquisition of an asset with a view to gain potential financial benefits.

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Using sales forecasting based on its annual lease revenue from the existing fleet of 300 aircrafts and proportioning to the new 60 aircrafts bought last year, a simple approximation of RMB 362 million annual lease revenue could be derived for this investment. With an initial investment of US$2.6 billion, a payback period could be approximated by dividing this with a monthly contribution of RMB 30 million. From this simplistic calculation, it would take approximately 44 years to recover the initial investments. A payback period refers to the length of time before the investment generates sufficient revenue to recover the initial cost outlay. Directors and managers may find this too long a payback period so reject the idea.

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However, if directors and managers are risk takers they may consider other qualitative factors that may give Minsheng longer term benefits such as increased market share through product development or even market development, increase in brand recognition and customer loyalty. An expansion of its fleet of aircraft would allow Minsheng to provide more existing leasing services in existing markets (product development) or even to new markets (market development). This acquisition presented an opportunity for Minsheng to purse its long term strategic vision of being the best leasing company in China and beyond. An implication to business travelers is greater convenience and more efficient services from Minsheng.

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While growth was the main intention of Minsheng&rsquo;s strategy, innovation seems to be the major driver for Facebook. Innovation refers to how businesses generates new commercial ideas or make improvements to its products and services. Facebook is basically an internet-based social networking service with a vision to &ldquo;give people the power to share and make the world more open and connected.&rdquo; Facebook is a market leader among instant messaging (IM) apps, with 79% of total market share in the IM market.

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Facebook continually innovates its IM tools with unique functions such as face recognition, self-destructing messages and Uber rides, which differentiates it from other IM tools. Facebook&rsquo;s acquisition of WhatsApp, a mobile messaging app, stems from its over 450 million users each month. WhatsApp&#39;s group messaging function was reported to be increasingly used as a replacement for Facebook&#39;s groups function. But with a price tag of US$19 billion, internal stakeholders such as shareholders would question the merits of this investment. Thus, the role of investment appraisal allows a quantitative analysis of this takeover of WhatsApp. Assuming a monthly contribution of US$15 million approximated based on its financial statement and an initial investment of US$19 billion, an elementary computation of investment appraisal shows a payback period of over 600 years. Clearly from a quantitative perspective, this is not a rational decision. Facebook&rsquo;s shareholders have to be convinced that taking over WhatsApp would potentially allow new opportunities to provide more innovative features over mobile devices to its external stakeholders, Facebook users, while at the same time allow its internal stakeholders, directors and managers to fulfil the corporate vision.

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In conclusion, the role of investment appraisal in business strategy and innovation is to provide a quantitative assessment of financial costs and benefits for decision making. However, depending on the techniques used such as payback period, relying on investment appraisals alone could lead to a myopic or short-term perspective or bias towards financial gains in the long run. Benefits and returns from strategies and innovation tend to be long-term and sometimes even be in the form of intangibles, such as brand image and brand loyalty and these are not considered in investment appraisals. It is an important planning tool as decisions made will have serious implications to various internal and external stakeholders.

This question would be considered difficult as it requires knowledge of financial information. This means prior research into the business organizations is needed for Criterion B. In this essay, there is good application of a real-world business along with worthy connections made between the concepts of strategy and innovation, and investment appraisal.

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The essay also showed good knowledge and understanding as relevant key terms are defined well. The candidate was not very successful in presenting tw arguments for and against the role of investment appraisal for business strategy and innovation, resulting in a lower mark band for Criterion C. All structural elements were present pertaining to Criterion D. Whilst individual and group stakeholders were identified in the essay, the impact on strategy and innovation should be made clearer in order to reach the top mark band for Criterion E.

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