A Level Business: Objectives and Strategic Decisions — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Objectives and Strategic Decisions revision notes

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Section A

1. Distinguish between a strategy and a tactic, giving an example of each. [4]

2. State the four options in Ansoff’s matrix. [2]

Section B

3. Explain each quadrant of Ansoff’s matrix, giving an example and stating which carries the greatest risk and why. [8]

4. Explain Porter’s three generic strategies and the danger of being “stuck in the middle”. [8]

5. Explain how a SWOT analysis is used, and give two limitations of it. [6]

6. Evaluate whether a business should always follow a planned strategy rather than an emergent one. [12]

Section C — Decision trees and investment appraisal

7. A firm is choosing between two strategic options.

Option A costs £50,000 to implement, with a 0.6 probability of a £200,000 payoff and a 0.4 probability of a £20,000 payoff. Option B costs £30,000 to implement, with a 0.7 probability of a £100,000 payoff and a 0.3 probability of a £10,000 payoff.

(a) Calculate the expected value and net gain of each option. [4] (b) State which option the decision tree recommends, and give two limitations of using this result alone. [4]

8. A project requires an initial investment of £100,000 and is expected to generate £40,000 cash flow in each of the next four years.

(a) Calculate the payback period. [2] (b) Calculate the accounting rate of return (ARR). [3] (c) Explain one advantage NPV has over both these methods. [2]

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Answers

1. A strategy is a long-term plan for achieving the corporate objectives, involving significant resources and taken by senior management — for example entering the Asian market [1] [1]. A tactic is a short-term decision to implement the strategy, easily reversed and taken at a lower level — for example running a two-week promotional discount [1] [1].

2. Market penetration, market development, product development, diversification [2 — 1 mark for two correct].

3. Market penetration — selling existing products in existing markets, e.g. increasing advertising to raise usage among current customers; lowest risk because both product and market are known [1] [1]. Market development — selling existing products in new markets, e.g. exporting to a new country; moderate risk from unfamiliar customer needs [1] [1]. Product development — selling new products to existing customers, e.g. launching a new model to a loyal base; risk lies in development cost and technical failure [1] [1]. Diversification — new products in new markets; the greatest risk, because the business has neither market knowledge nor product experience to fall back on, so both sources of uncertainty apply at once [1] [1].

4. Cost leadership — becoming the lowest-cost producer in the industry, competing on price and relying on volume and efficiency [1] [1]. Differentiation — offering a product perceived as unique in quality, design or brand, allowing a price premium [1] [1]. Focus — applying either cost leadership or differentiation to a narrow market segment rather than the whole market [1] [1]. Stuck in the middle — a business that is neither the cheapest nor sufficiently differentiated [1] has no clear reason for customers to choose it, so it is undercut by low-cost rivals and out-positioned by premium ones, and its margins are squeezed from both directions [1].

5. SWOT organises an analysis into internal strengths and weaknesses and external opportunities and threats [1] [1], so that the business can build strategy on its strengths to exploit opportunities while addressing weaknesses that expose it to threats [1]. Limitations: it produces a list rather than a priority order or a decision, so it does not indicate which factors matter most [1]; it is subjective, reflecting the views of whoever compiles it, and can become a self-congratulatory exercise [1]; it is a snapshot that dates quickly in a fast-moving market [1].

6. For planned strategy: it provides clear direction and allows resources to be allocated in advance, so departments work towards the same goal [1]; it makes it possible to set measurable targets and hold managers accountable [1]; it reassures investors and lenders, who want to see a coherent plan before committing capital [1]. Against: a rigid plan can produce strategic drift — the business continues on a course that no longer fits a changed environment [1]; emergent strategy allows the business to respond to unforeseen opportunities, such as a competitor failing or a new technology appearing [1]; detailed long-term planning is expensive and its forecasts are frequently wrong in volatile markets [1]; many highly successful strategies were discovered in practice rather than planned, arising from experimentation on the ground [1]. Judgement: the two are complementary rather than alternatives [1]. A business needs a planned sense of direction with the flexibility to adapt the route [1]. The right balance depends on how volatile the market is and how large the resource commitment is [1] — a utility investing in infrastructure over thirty years must plan; a fashion retailer must remain largely emergent [1].

7. (a) Option A: expected value = (0.6 × £200,000) + (0.4 × £20,000) = £120,000 + £8,000 = £128,000; net gain = £128,000 − £50,000 = £78,000 [2]. Option B: expected value = (0.7 × £100,000) + (0.3 × £10,000) = £70,000 + £3,000 = £73,000; net gain = £73,000 − £30,000 = £43,000 [2]. (b) Option A is recommended, since its net gain (£78,000) is higher than Option B’s (£43,000) [1]. Any two limitations, 1 mark each: the probabilities are estimates, often subjective, so the whole calculation is only as reliable as the guesses that feed it; the model ignores qualitative factors such as staff morale, brand reputation or strategic fit; it takes no account of the timing of the returns, unlike NPV [2].

8. (a) Payback period = initial investment ÷ annual cash flow = £100,000 ÷ £40,000 = 2.5 years [2]. (b) Total cash flow over four years = £40,000 × 4 = £160,000; total profit = £160,000 − £100,000 = £60,000; average annual profit = £60,000 ÷ 4 = £15,000 [1]. ARR = (£15,000 ÷ £100,000) × 100 = 15% [2]. (c) NPV accounts for the time value of money — a pound received in a future year is discounted to reflect that it is worth less than a pound received today — which neither payback nor ARR does, since both treat every year’s cash flow as equally valuable regardless of when it arrives [2].

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Where marks are usually lost

• Giving a tactic as an example of a strategy.
• Not explaining why diversification is the riskiest quadrant.
• Describing SWOT without noting it produces no priorities.
• Treating planned and emergent strategy as mutually exclusive.