AQA A-Level Business: Strategic methods: how to pursue strategies (7132) – Revision Notes

These notes condense section 3.9 of the AQA AS and A-level Business specification (7132), “Strategic methods: how to pursue strategies” (A-level only). For full explanations and worked examples, read the study guide. Then try the practice questions, the A-level Business hub, the printable checklist and the free diagnostics.

3.9.1 Change in scale

Key definitions

Term	Meaning
Organic growth	Growth from the firm’s own resources (new products, outlets, customers)
External growth	Growth through other firms: merger, takeover, venture, franchising
Retrenchment	Reducing the scale of the business (closures, disposals, job cuts)
Merger	Two firms agree to join
Takeover	One firm buys control of another (friendly or hostile)
Venture	Joint venture or alliance sharing cost, risk and control
Franchising	Franchisor licenses its brand and system for a fee and royalty
Horizontal integration	Same industry, same stage
Backward vertical	Integration with a supplier
Forward vertical	Integration with a distributor or retailer
Conglomerate	Integration with an unrelated business

Reasons

• Growth: more sales revenue, profit and market share; lower unit costs; market power; spreading risk; defence against takeover.
• Retrenchment: falling demand, loss-making units, high debt, refocusing on core activities, cutting costs.

Scale and cost issues

Concept	Remember
Technical economies	Bigger, more efficient machines and processes
Purchasing economies	Bulk-buying discounts
Managerial economies	Specialist managers spread over more output
Economies of scope	Lower average cost from a related product range sharing resources
Diseconomies of scale	Rising average cost at large size: communication, coordination and motivation problems
Experience curve	Unit cost falls with cumulative output; often stated as a percentage per doubling
Synergy	Combined value greater than the parts
Overtrading	Sales grow faster than the working capital that supports them

Average cost = total cost / output. Scale is about output per period. The experience curve is about total output over time.

Method: experience curve

1. Identify the starting unit cost and the percentage curve (for example 90%).
2. Each time cumulative output doubles, multiply by the percentage.
3. State the cost at each doubling.

Reminder: a 90% curve starting at £100 gives £90, then £81.

Method: assess overtrading

1. Compare sales growth with cash and finance. Sales rising from 550 to 660 is 20% growth: (660 - 550) / 550.
2. Check the current ratio (current assets / current liabilities, standard form) and cash.
3. Look for rising stock and trade receivables, and late supplier payments.
4. Recommend slower growth, longer-term finance or tighter credit control.

Greiner’s model of growth

Growth through creativity (crisis of leadership), direction (crisis of autonomy), delegation (crisis of control), coordination (crisis of red tape), then collaboration. Each crisis forces a new management approach. Use it to judge what a growing firm needs next, and note that firms rarely follow it exactly.

Franchising reminder

Franchisor income = initial fee + royalty. With a 5% royalty on sales of £80,000, the royalty is £4,000. Benefits: rapid growth with little capital. Costs: less control over standards and a shared brand risk.

Merger or organic: quick comparison

	Organic	External
Speed	Slow	Fast
Cost	Lower	Higher
Risk	Lower	Higher: integration and culture
Control	High	Shared or disrupted

Synergy example: two firms earn profits of £5m and £3m separately and £10m combined, so synergy is £2m.

Functional areas

Marketing (brand, market share), operations (capacity, quality), finance (funding, cash flow), human resources (structure, recruitment, redundancy).

3.9.2 Innovation

Term	Meaning
Product innovation	A new or improved good or service
Process innovation	A new way to make or deliver it
Kaizen	Continuous improvement through small changes by all staff
R&D	Planned investment in new knowledge, products and processes
Intrapreneurship	Entrepreneurial behaviour by employees inside the firm
Benchmarking	Comparing with best practice and adopting what works
Patent	Time-limited legal right over an invention
Copyright	Legal protection of original creative work

• Pressures: competitors, customer tastes, technology, shorter product life cycles, cost.
• Value: competitive advantage, premium prices, lower cost, new markets. Costs: spending, failure, imitation.
• Compare the four routes: Kaizen is cheap and gradual; R&D is costly and uncertain; intrapreneurship needs culture; benchmarking catches up but does not lead.
• IP: patents and copyrights give legal protection, but cost money and are limited in time and place.
• Functional areas: marketing (launch), operations (retooling), finance (funding and return), human resources (skills, culture).

3.9.3 Internationalisation

• Reasons: saturated home market, faster growth, risk spread, economies of scale.
• Attractiveness: market size and growth, income, competitors, stability, culture, trade barriers, infrastructure, exchange rates.
• Produce or source abroad: lower costs, skills, resources, closeness to customers. Off-shoring moves production abroad; re-shoring returns it.
• Multinational: operates in more than one country.

Entry methods

Method	Best when	Weakness
Export	Testing a market cheaply	Little control of local selling
Licensing	Capital is scarce	Quality and brand control
Alliances	Local knowledge is needed	Shared profit, disputes
Direct investment	The market is large and long term	Cost and risk

Bartlett and Ghoshal

Strategy	Local responsiveness	Cost reduction pressure
International	Low	Low
Multi-domestic	High	Low
Global	Low	High
Transnational	High	High

Influences on buying, selling and producing abroad: exchange rates, culture, laws, trade barriers, transport. Functional areas: marketing (adaptation), operations (supply chains), finance (currency and funding), human resources (cross-cultural management).

3.9.4 Digital technology

Term	Meaning
E-commerce	Buying and selling online
Big data	Very large, fast-growing sets of data
Data mining	Searching data for patterns
ERP	Integrated software linking functions such as finance, stock and orders

Pressures: competitors, customer expectations, cost, supply chain. Value: reach, personalisation, forecasting, efficiency. Risks: cost, security, resistance. Functional areas: marketing (targeting), operations (stock and scheduling), finance (real-time data), human resources (skills and jobs).

Building a judgement

Questions in this topic ask you to assess a method for a particular business. Use this chain.

1. Point: state the method and what it offers (for example, a joint venture gives local knowledge).
2. Evidence: pull a number or fact from the case (cash balance, market growth, the firm’s size).
3. Link: explain the effect on a function or objective (lower cost, faster entry, weaker control).
4. Counter: give the best argument against.
5. Judgement: say which side wins and what it depends on, such as the firm’s cash, its time horizon, how fast rivals move, or how different the new market is.

Typical “it depends” factors

Method	It depends on
External growth	Cash available, quality of the target, culture fit
Retrenchment	Whether the fall in demand is temporary, and the cost of redundancies
Innovation	The firm’s cash, product life cycle length, strength of IP protection
Entry mode abroad	Capital, risk appetite, need for control, market size
Digital investment	Customer habits, rivals’ moves, staff skills, data security

Retrenchment checklist

Reasons: falling demand, losses, debt, refocus. Methods: closing sites, selling divisions, cutting product lines, reducing staff. Effects: lower costs and a smaller cash drain, but redundancy payments, lower morale, damage to reputation and a risk of cutting capacity the firm later needs.

Linking the four sections

Growth abroad often depends on digital tools such as e-commerce. Innovation may be the reason a firm can compete internationally. Rapid growth can cause overtrading, which limits the money available for innovation. A good extended answer connects sections like this rather than treating each in isolation.

Must-know distinctions

• Merger (agreed) versus takeover (control bought).
• Economies of scale (output per period) versus experience curve (cumulative output).
• Economies of scale versus economies of scope (one product’s volume versus a range).
• Backward (supplier) versus forward (customer side) integration.
• Product versus process innovation.
• Off-shoring versus re-shoring.
• International versus multi-domestic strategies: transfer home products or adapt to each country.
• Big data (the information) versus data mining (the analysis).

Quick self-test

1. Define organic growth.
2. Name the three economies of scale the specification lists.
3. A 90% experience curve starts at £100. What is the cost after two doublings?
4. Aldbrook Joinery buys a timber yard. Which type of integration is this?
5. A franchisee has sales of £80,000 and pays a 5% royalty. How much is the royalty?
6. Which Bartlett and Ghoshal strategy combines high local responsiveness with high cost pressure?
7. Give two ways of protecting intellectual property named in the specification.
8. A firm’s sales rise from 550 to 660. Calculate the percentage growth.
9. State one difference between off-shoring and re-shoring.
10. Name two things an ERP system links.
11. Give one reason a growing profitable firm might fail through overtrading.
12. Identify one example of process innovation.

Answers

1. Growth from the firm’s own resources, such as new products or outlets.
2. Technical, purchasing and managerial.
3. £81 (100 x 0.9 x 0.9).
4. Vertical backward integration (a supplier).
5. £4,000.
6. Transnational.
7. Patents and copyrights.
8. 20%.
9. Off-shoring moves production abroad; re-shoring brings it back home.
10. Any two of finance, stock, orders, HR.
11. Cash is tied up in stock and trade receivables, so it cannot pay suppliers and wages on time.
12. For example, a new automated production line or a new online booking system.

Where marks are usually lost

• Defining terms but not applying them to the business in the case.
• Mixing up mergers and takeovers, or horizontal and vertical integration.
• Treating overtrading as overproduction rather than a cash-flow problem.
• Quoting Greiner’s phases with no judgement about the firm’s position.
• Offering one-sided answers on international entry methods with no weighing.
• Naming Bartlett and Ghoshal strategies without linking to the two pressures.
• Forgetting to show the working in a unit-cost or percentage calculation.
• Ending an evaluation without a reasoned judgement on which option suits this business.

Frequently asked questions

What is the difference between economies of scale and the experience curve? Economies of scale come from output per period: producing more at once lowers average cost. The experience curve comes from cumulative output over time: unit cost falls each time total output doubles.

What are the stages of Greiner’s model of growth? Growth through creativity leads to a crisis of leadership, direction to a crisis of autonomy, delegation to a crisis of control, and coordination to a crisis of red tape, followed by growth through collaboration. Firms rarely follow it exactly.

What is the difference between big data and data mining? Big data is the information itself, the very large data sets a business holds. Data mining is the analysis of that data to find patterns.

Which economies of scale are listed in AQA 7132? The specification lists technical, purchasing and managerial economies of scale.

How do you calculate franchisor income? Franchisor income = initial fee + royalty. For example, a 5% royalty on sales of £80,000 earns £4,000 in royalties.

Official syllabus

AQA AS and A-level Business (7131 and 7132), section 3.9, “Strategic methods: how to pursue strategies” (A-level only), AQA.