A Level Business: Objectives and Strategic Decisions — Revision Notes

Condensed for the final weeks. For the full explanation, use the Objectives and Strategic Decisions study guide.

Objectives and the hierarchy

Mission (why the business exists) → corporate objectives (whole business) → functional objectives (marketing, finance, operations, HR) → tactics.

Objectives should be SMART. Corporate objectives include profit maximisation, growth, market share, survival, diversification, and increasingly social and environmental goals.

Strategy is the long-term plan for achieving objectives; tactics are short-term actions serving it. Strategic decisions are long-term, high-risk, costly to reverse, and taken at the top; tactical decisions are the opposite.

Analytical frameworks

SWOT — Strengths and Weaknesses are internal; Opportunities and Threats are external. Putting an item in the wrong half is a common error, and the useful move is to pair them: which strength lets us take which opportunity, which weakness exposes us to which threat.

PESTLE — Political, Economic, Social, Technological, Legal, Environmental. All external.

Porter’s Five Forces: competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers. It assesses the attractiveness of an industry, not the strength of one firm — a distinction worth making explicitly.

Porter’s generic strategies: cost leadership, differentiation, and focus (cost or differentiation within a niche). Porter’s argument is that a firm attempting both cost leadership and differentiation risks being “stuck in the middle” — a claim worth challenging in evaluation, since firms such as large supermarkets arguably do both successfully.

Ansoff’s Matrix

	Existing product	New product
Existing market	Market penetration — lowest risk	Product development
New market	Market development	Diversification — highest risk

Risk rises as you move away from what the business already knows. Diversification is riskiest because both the product and the market are unfamiliar — the business has no existing competence in either.

Decision trees

Work right to left, calculating expected values.

expected value = sum of (probability x payoff)
net gain = expected value - cost of the decision

Choose the branch with the highest net gain.

Evaluation is where the marks are: the probabilities are estimates, often subjective; the model ignores qualitative factors such as staff morale and brand reputation; it assumes outcomes are known and quantifiable; and it takes no account of the timing of returns. It is a decision aid, not a decision.

Worked example. Option A costs £50,000, with 0.6 probability of £200,000 and 0.4 probability of £20,000. Option B costs £30,000, with 0.7 probability of £100,000 and 0.3 probability of £10,000.

A: EV = (0.6 x 200 000) + (0.4 x 20 000) = 128 000    net gain = 128 000 - 50 000 = 78 000
B: EV = (0.7 x 100 000) + (0.3 x 10 000) =  73 000    net gain =  73 000 - 30 000 = 43 000

Option A is recommended, since its net gain (£78,000) exceeds Option B’s (£43,000).

Investment appraisal

payback period       = time to recover the initial outlay
ARR = (average annual profit / initial investment) x 100
NPV = sum of discounted cash flows - initial investment

Method	Strength	Weakness
Payback	Simple; useful when cash flow is tight	Ignores everything after payback and ignores profitability
ARR	Considers total profitability	Ignores the timing of cash flows
NPV	Accounts for the time value of money	Requires a discount rate, which is itself a judgement

NPV is theoretically strongest because a pound received in five years is worth less than a pound today, and only NPV reflects that. But the discount rate chosen changes the answer, so the result is only as good as that assumption.

Positive NPV means accept; negative means reject.

Worked example. A project needs an initial investment of £100,000 and generates £40,000 cash flow in each of the next four years.

Payback = 100 000 / 40 000 = 2.5 years
Total profit = (40 000 x 4) - 100 000 = 60 000    average annual profit = 60 000/4 = 15 000
ARR = (15 000 / 100 000) x 100 = 15%

Neither payback nor ARR discounts these cash flows, so both treat a pound received in year four as equally valuable as a pound received now — which is exactly what NPV corrects for.

Risk and uncertainty

Risk can be quantified with probabilities; uncertainty cannot. That distinction matters because decision trees and expected values handle risk, but not uncertainty — and most genuinely strategic decisions involve uncertainty.

Contingency planning and crisis management address what cannot be predicted: business continuity plans, succession planning, insurance, and diversified suppliers.

Answering strategy questions

Every strategic recommendation should consider: the objectives (does it serve them?), the resources (can the firm afford it?), the market (will customers respond?), the competition (how will rivals react?), the risk, and the time frame.

Then judge, and say what the judgement depends on. “It depends on whether the firm can finance it without excessive gearing” is a conclusion; “there are advantages and disadvantages” is not.

Exam traps

• Putting opportunities and threats in the internal half of a SWOT.
• Using Five Forces to analyse a single firm rather than an industry.
• Calculating a decision tree without evaluating the model’s limitations.
• Recommending payback where long-term profitability matters.
• Treating risk and uncertainty as the same thing.
• A conclusion with no criterion.

Self-test

1. Which parts of SWOT are internal and which external?
2. What does Porter’s Five Forces actually assess?
3. Why is diversification the riskiest Ansoff strategy?
4. Give two limitations of decision trees.
5. Why is NPV theoretically superior to ARR?

Answers: 1. Strengths and weaknesses are internal; opportunities and threats are external. 2. The attractiveness and profitability of an industry, not the competitive strength of an individual firm. 3. Both the product and the market are new to the business, so it has no existing competence in either. 4. Probabilities are estimates and often subjective; the model ignores qualitative factors such as morale and reputation — also that it assumes outcomes are quantifiable and ignores timing. 5. It discounts future cash flows to present value, accounting for the time value of money, which ARR ignores entirely.