OCR A Level Business: Objectives and Strategic Decisions — Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — 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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These questions represent OCR H431/02 (The UK Business Environment), whose live paper opens with a Section A of short-answer questions (20 marks) and continues with a Section B of extended-response questions (60 marks) that relate to a Resource Booklet describing a real-life business.

Section A — Short-Answer Questions

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 — Extended-Response Questions

Questions 3–8 are free-standing and do not use the Resource Booklet (questions 7 and 8 give their own data). Question 9, at the end of this section, uses the Resource Booklet on Maple & Kent.

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 can be used to analyse the marketing position of a business, and give two limitations of it. [6]

6. Evaluate the extent to which contingency planning can protect a business from the effects of a crisis. [12]

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. (Investment appraisal is content from the Management Accounting area of study, not Business Objectives and Strategic Decisions – included here because decision trees and investment appraisal are often revised together. All content is assessable in every component, so this does not affect which paper it can appear on.) 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 average rate of return (ARR). [3] (c) Explain one advantage NPV has over both these methods. [2]

Resource Booklet Question (Section B)

Resource Booklet. Maple & Kent is a UK-based chain of 14 homeware stores, selling kitchenware and furnishings through its stores and a growing website. It faces a well-established, low-price competitor and a smaller, design-led online rival. Sales growth has slowed over the past two years and the board is reviewing its strategic options, including whether to open stores overseas.

Question 9 refers to Maple & Kent.

9. Using Maple & Kent, evaluate whether opening stores overseas is the most appropriate strategic option for reversing its slowing sales growth. [15]

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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. Applied to a business’s marketing position, SWOT organises an analysis into internal strengths and weaknesses [1] and external opportunities and threats [1], so that the business can build its marketing strategy on strengths that exploit opportunities [1] while addressing weaknesses that expose it to threats [1]. Limitations (any two, 1 mark each): it produces a list rather than a priority order or a decision, so it does not indicate which factors matter most; it is subjective, reflecting the views of whoever compiles it, and can become a self-congratulatory exercise; it is a snapshot that dates quickly in a fast-moving market [2].

6. For contingency planning: it allows a business to react quickly rather than being caught unprepared [1], reducing the damage caused by events such as a fire, a cyber-attack or a sudden loss of a major supplier [1]; having a plan in place can protect the business’s reputation with customers and stakeholders, who see a competent response rather than confusion [1]; it can be a condition of insurance cover or of contracts with major customers, so the planning has value beyond the crisis itself [1]. Against: contingency planning is time-consuming and costly to prepare and to keep up to date, and a small business in particular may not have the spare resources to justify it [1]; a plan cannot cover every possible crisis, so a business that has planned for one type of disruption may still be unprepared for another [1]; over-reliance on a written plan can make managers slower to improvise when the real crisis does not match what was planned for [1]; the cost of prevention may exceed the cost of the risk actually materialising, particularly for a low-probability event [1]. Judgement: the value of contingency planning depends on how likely and how damaging the crisis would be without it [1] — a business in an industry prone to disruption (for example, one dependent on a single supplier or vulnerable to cyber-attack) gains more from planning than one facing few realistic threats [1]. A balance of a core plan for the most likely crises, kept flexible enough to adapt to the unexpected, gives most of the benefit without the full cost of planning for every eventuality [1] [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) [2]. 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].

9. For overseas expansion: it opens access to a larger customer base at a time when the UK market has stopped growing for Maple & Kent, which market development in Ansoff’s terms can offer without the greater risk of a genuinely new product [1] [1]; entering a market not already crowded by its two named UK rivals could let it reset the basis of competition away from the price war with its low-cost competitor [1] [1]. Against: overseas expansion carries significant market-development risk — unfamiliar customer preferences, regulation and logistics — and requires capital and management attention that a business with slowing sales may be poorly placed to commit [1] [1]; it does nothing to address the underlying competitive pressure at home from the low-cost and design-led rivals, which will continue regardless of what happens overseas [1] [1]; and as a physical retail chain, opening stores overseas also carries higher fixed costs and slower breakeven than the website-led alternatives available to the business [1]. Alternative options: product development (a stronger, more differentiated online range to compete with the design-led rival) or market penetration (price or loyalty initiatives against the low-cost rival) both address the stated problem more directly and at lower risk than diversifying into a new geographic market [1] [1] [1]. Judgement: given that Maple & Kent’s sales problem is rooted in UK competitive pressure rather than a saturated market, a lower-risk option that responds directly to that pressure is more likely to reverse the slowdown than overseas expansion, which should be considered only once the domestic competitive position is stabilised [1] [1] [1].

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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.
• Describing a contingency plan without evaluating whether its benefits justify its cost.