Hello, this is my first post on Beat the GMAT, although I am a long time observer. I am at the AWA portion of my study plan and would like an analysis of this essay. Mainly, is it too long? It took almost the full 30 minutes with a quick (1-2 minute) review. It is for the following question (it is from the OG):
The following appeared as part of the business plan of an investment and financial consulting firm:
"Studies suggest that an average coffee drinker's consumption of coffee increases with age, from age 10 through age 60. Even after age 60, coffee consumption remains high. The average cola drinker's consumption of cola, however, declines with increasing age. Both of these trends have remained stable for the past 40 years. Given that the number of older adults will significantly increase as the population ages over the next 20 years, it follows that the demand for coffee will increase and the demand for cola will decrease during this period. We should, therefore, consider transferring our investments from Cola Loca to Early Bird Coffee."
___________________________________________________________
The nature of an investment decision involves many quantitative and qualitative factors. Due to the complexity of these decisions, it is crucial that an investment firm take into account various possibilities and alternatives to the most obvious solution. Although the firm in this decision has a solid base for deciding on future investments, if they decide to switch from Cola Loca (CL) to Early Bird Coffee (EBC), based solely on the information given, their choice is flawed as it is based on a number of shaky assumptions.
The first assumption concerns the strategic direction of each firm involved. For example, if we assume the reason that the older generation lower their cola intake is due to health concerns, and CL is currently working on a revolutionary cola that tastes like cola, yet has the side effects of water, then it is likely that CL will be a profitable investment going forward. Conversely, if EBC's main product is marketed as a hip drink for a younger generation of coffee drinkers, then their is no gaurantee that they will cash in on the proposed demographic shift. A proposed shift that seems likely, but is not as black and white as the firm assumes and therefore the decision to switch investments to EBC needs further consideration.
This second assumption is based on the fact that the # of older adults will increase, but does not take into account a potential unexpected baby boom. For example, no one predicted that after the power outage in Ontario in the early 2000s that their would be a mini population boom 9 months later. This population boom could have a large impact on that markets demographics, especially over the 20 year time frame given in the case. That being said, even if we assume the demographic shift will occur for certain, their is no gaurantee that EBC will be a safe investment.
For EBC to increase profitability, they must be a stable company with scalable operations to account for increased sales without a significant increase in expenses. This also means that no new entrepreneurs will see the same demographic shift occurring and open new coffee outlets to cash in on the trend. The investment firm fails to take into account the fact that with an increase in demand, an increase in supply is also possible and new coffee stores may benefit from the market growth with EBC remaining relatively stagnant. Therefore, the decision to invest in EBC may not be the best choice for the investment firm.
Although EBC looks like a viable investment on the surface, further analysis shows that the decision is based on too many assumptions and is ultimately flawed. The decision could be strengthened if the firm has access to the strategic direction of each firm or more information on the supply trends of the coffee industry. Rather, the firm offers a recommendation on too shaky of a foundation and can not be taken at face value.
Any advice would be awesome! Thank you in advance!
The following appeared as part of the business plan of an investment and financial consulting firm:
"Studies suggest that an average coffee drinker's consumption of coffee increases with age, from age 10 through age 60. Even after age 60, coffee consumption remains high. The average cola drinker's consumption of cola, however, declines with increasing age. Both of these trends have remained stable for the past 40 years. Given that the number of older adults will significantly increase as the population ages over the next 20 years, it follows that the demand for coffee will increase and the demand for cola will decrease during this period. We should, therefore, consider transferring our investments from Cola Loca to Early Bird Coffee."
___________________________________________________________
The nature of an investment decision involves many quantitative and qualitative factors. Due to the complexity of these decisions, it is crucial that an investment firm take into account various possibilities and alternatives to the most obvious solution. Although the firm in this decision has a solid base for deciding on future investments, if they decide to switch from Cola Loca (CL) to Early Bird Coffee (EBC), based solely on the information given, their choice is flawed as it is based on a number of shaky assumptions.
The first assumption concerns the strategic direction of each firm involved. For example, if we assume the reason that the older generation lower their cola intake is due to health concerns, and CL is currently working on a revolutionary cola that tastes like cola, yet has the side effects of water, then it is likely that CL will be a profitable investment going forward. Conversely, if EBC's main product is marketed as a hip drink for a younger generation of coffee drinkers, then their is no gaurantee that they will cash in on the proposed demographic shift. A proposed shift that seems likely, but is not as black and white as the firm assumes and therefore the decision to switch investments to EBC needs further consideration.
This second assumption is based on the fact that the # of older adults will increase, but does not take into account a potential unexpected baby boom. For example, no one predicted that after the power outage in Ontario in the early 2000s that their would be a mini population boom 9 months later. This population boom could have a large impact on that markets demographics, especially over the 20 year time frame given in the case. That being said, even if we assume the demographic shift will occur for certain, their is no gaurantee that EBC will be a safe investment.
For EBC to increase profitability, they must be a stable company with scalable operations to account for increased sales without a significant increase in expenses. This also means that no new entrepreneurs will see the same demographic shift occurring and open new coffee outlets to cash in on the trend. The investment firm fails to take into account the fact that with an increase in demand, an increase in supply is also possible and new coffee stores may benefit from the market growth with EBC remaining relatively stagnant. Therefore, the decision to invest in EBC may not be the best choice for the investment firm.
Although EBC looks like a viable investment on the surface, further analysis shows that the decision is based on too many assumptions and is ultimately flawed. The decision could be strengthened if the firm has access to the strategic direction of each firm or more information on the supply trends of the coffee industry. Rather, the firm offers a recommendation on too shaky of a foundation and can not be taken at face value.
Any advice would be awesome! Thank you in advance!
