Business decisions and strategy (A Level) flashcards

Topic 3: Business decisions and strategy

Ansoff's Matrix: the four strategies, by risk

Market penetration (existing products, existing markets) is lowest risk; market development (existing products, new markets); product development (new products, existing markets); diversification (new products, new markets) is highest risk.

Porter's Strategic Matrix (generic strategies)

Cost leadership, differentiation, cost focus and differentiation focus. A firm competes either on cost or on difference, across a broad market or a narrow focus.

Porter's five forces

Rivalry among competitors, threat of new entrants, threat of substitutes, buyer power, supplier power. Example: few large buyers → high buyer power, prices squeezed.

Organic vs inorganic growth

Organic: new products, markets, outlets or capacity; slow but controlled and keeps the culture. Inorganic: merger (agreed combination) or takeover (buying control); fast but costly and risky.

Horizontal, vertical and conglomerate integration

Horizontal: same stage, same industry. Vertical: forward (towards customers) or backward (towards suppliers). Conglomerate: unrelated industries; spreads risk.

Payback: formula, with an example

Full years + (cost still to recover ÷ cash flow in the payback year). Cost 60,000; inflows 15,000, 25,000, 30,000: after 2 years 40,000 recovered; 20,000 ÷ 30,000 = 0.67 → 2.67 years.

Average rate of return (ARR): formula, with an example

(Total net return − cost) ÷ years ÷ cost × 100. Cost 60,000, total inflows 90,000 over 4 years: 30,000 ÷ 4 = 7,500; 7,500 ÷ 60,000 × 100 = 12.5%.

Net present value (NPV)

Sum of (each cash flow × its discount factor) − initial cost. A positive NPV supports investing, but depends on the discount rate and forecasts. Trap: giving the PV total without subtracting the cost.

Decision tree: method and limitations

Work right to left: expected value (EV) = Σ(probability × outcome) at each chance node, subtract the option's cost, choose the highest net EV. Example: 0.7 × 80 + 0.3 × 20 = 62; minus cost 30 = 32. Limits: subjective probabilities, money only.

Critical path analysis: total float

Total float = LFT at end node − EST at start node − duration. Example: 12 − 4 − 5 = 3 days. Activities with zero float are on the critical path. Forward pass takes the larger EST where paths merge.

Gearing and ROCE

Capital employed = non-current liabilities + total equity. Gearing = non-current liabilities ÷ capital employed × 100. ROCE = operating profit ÷ capital employed × 100.

Stakeholder model vs shareholder model

Stakeholder model: decisions consider all stakeholders (staff, customers, community…). Shareholder model: decisions focus on share price and dividends for owners.

Four types of organisational culture

Power, role, task and person cultures. Culture is formed by founders, history, leadership and structure, and is hard to change because of habit and resistance.

Business continuity and succession planning

Ways to mitigate risks such as natural disasters, IT systems failure and loss of key staff. Continuity planning keeps the business running in a crisis; succession planning prepares people to replace key staff.