OxfordAQA A-Level Business: Strategic options: choosing which markets to compete in and what products to offer (9725)

Everything below is built on the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. Its subject is section 3.4.1 Strategic options: choosing which markets to compete in and what products to offer, the opening section of 3.4 Business strategy, and every outcome in it is International A-level only. Students completing the older 9625 specification should work from their own specification instead.

Condensed version: revision notes · Test yourself: practice questions · Course page: OxfordAQA A-level Business · Checklist: printable 9725 list · Diagnose gaps: free diagnostics

Coverage of 3.4.1

Spec area (3.4.1)	What you must be able to do	Stage
Strategy	Explain the meaning and significance of a strategy; identify the features of a strategic decision; explain how SWOT analysis (including the data calculations from 3.3.1) influences the choice of strategy; explain the link between strategy and functional decisions	International A-level only
Markets and products	Understand the Ansoff matrix and assess the value of market penetration, market development, product development and diversification; analyse the implications of each for the functional areas; explain the reasons for, and challenges of, changing strategy	International A-level only

How it is examined. Unit 4: Business strategy tests 3.4 in one paper (worth 80 marks over 1 hour 45 minutes, carrying 30% of the International A-level) made of two compulsory case-study sections. The SWOT calculations themselves are taught in the 3.3.1 SWOT guide; here you use them to choose a strategy.

1. What a strategy is and why it matters

A strategy is a long-term plan setting out how a business will achieve its objectives. It decides where the business will compete (which markets and which products) and commits resources to that direction. Tactics are the short-term, smaller actions that carry the strategy out, such as a weekend price promotion or a new shift pattern.

Significance of a strategy:

• It gives the whole business a shared direction, so departments pull the same way.
• It guides how scarce resources (finance, people, capacity) are allocated.
• It gives managers a benchmark to judge later decisions and results against.
• A good strategy builds on what the business does well and avoids areas where it is weak, which raises the chance of hitting objectives.

A strategy is only as good as its execution. A sound plan that staff do not understand, or that is not funded, will not deliver.

2. Features of a strategic decision

The specification lists four features. Learn them as a set, because questions often ask you to show that a decision is strategic.

Feature	What it means	Illustration
Difficult to reverse	Once made, undoing it is costly or slow	Signing a 15-year lease on a factory abroad
High risk	The outcome is uncertain and failure could threaten the business	Entering a market where the firm has no customers yet
Involve significant resources	Large sums of money, time and management attention	Borrowing to build a new production line
Usually one-off	Not routine; made rarely, often by senior managers	Choosing to sell to supermarkets instead of independent shops

A tactical decision is the opposite on each count: easy to reverse, lower risk, small resources, often repeated.

3. How SWOT analysis influences the choice of strategy

SWOT sorts the internal position (strengths and weaknesses) and the external environment (opportunities and threats). For strategic choice, the useful step is to match them: a sensible strategy uses strengths to take opportunities, and avoids options that expose weaknesses to threats. Section 3.4.1 expects you to calculate and interpret the SWOT data set out in 3.3.1 (financial ratios, marketing, operations and HR data) as part of this.

Worked example: Pellacombe Tiles Ltd

Pellacombe makes porcelain floor tiles for its home market. The directors are choosing a growth strategy. Data for last year:

• Revenue £18.4 million; operating profit £2.3 million; industry average operating margin 9%
• Capacity 5.0 million m² a year; output 3.6 million m²
• Home market for floor tiles £184 million, growing 1.5% a year
• Tile demand in two neighbouring countries growing about 9% a year
• Non-current liabilities £6 million; total equity £14 million

Step 1: calculate.

Operating profit margin = 2.3 ÷ 18.4 × 100 = 12.5%
Capacity utilisation    = 3.6 ÷ 5.0 × 100 = 72%  (1.4 million m² spare)
Home market share       = 18.4 ÷ 184 × 100 = 10%
Capital employed        = 6 + 14 = £20 million
Gearing                 = 6 ÷ 20 × 100 = 30%

Step 2: classify.

• Strength: margin of 12.5% beats the 9% average, so the product earns good returns.
• Strength: gearing of 30% is low, so the firm could borrow to fund expansion.
• Weakness: 72% utilisation means fixed costs are spread over less output than possible, raising unit costs. But spare capacity is also a resource for growth.
• Threat: the home market grows only 1.5%, so extra home sales must be taken from rivals.
• Opportunity: neighbouring markets grow about 9% a year.

Step 3: match and choose. Pushing harder at home means fighting for share in a slow market, and a 10% share suggests larger rivals who could respond. Selling the existing tiles abroad uses the spare capacity, the profitable product and the borrowing headroom against the fastest-growing demand. If exports took 60% of the spare capacity (0.84 million m²), utilisation would rise to (3.6 + 0.84) ÷ 5.0 × 100 = 88.8%, cutting unit costs too.

Judgement: the data points towards selling existing products in new countries. The limits: SWOT is a snapshot, the factors are not weighted, and the export opportunity depends on prices, tariffs and distribution that this data does not show.

4. The link between strategy and functional decisions

Strategy sits between corporate objectives and the work of each function:

Mission → corporate objectives → strategy → functional objectives → functional decisions

Each function sets its own objectives and decisions to deliver the strategy. If Pellacombe chooses exports, marketing must find distributors and set export prices; operations must schedule the extra output and meet foreign standards; HR must recruit export sales staff or language skills; finance must raise and budget the funds and manage currency.

The link runs both ways. What the functions can do limits which strategy is realistic: a firm with no spare cash or a stretched workforce may have to reject an attractive option. Functional decisions that contradict the strategy (for example, cutting the marketing budget while trying to enter new markets) weaken it.

5. The Ansoff matrix

The Ansoff matrix sets out four growth options by asking two questions: are the products existing or new, and are the markets existing or new?

	Existing products	New products
Existing markets	Market penetration	Product development
New markets	Market development	Diversification

Risk generally rises as a business moves away from what it knows: market penetration is usually lowest risk, diversification highest.

Assessing the value of each option

Market penetration: selling more of existing products to existing customers or segments (promotions, loyalty schemes, wider distribution, price cuts).

• Value: builds on known products and customers, so research and set-up costs are low.
• Limits: in a mature or saturated market, gains come from rivals who may retaliate; growth is capped by market size.

Market development: selling existing products in new markets (new regions, countries or customer segments).

• Value: spreads risk across markets and can extend a product’s life.
• Limits: the business may not understand local tastes, laws or competitors, and needs new distribution.

Product development: selling new or modified products to existing markets.

• Value: uses customer knowledge and brand loyalty; can keep the business ahead of rivals.
• Limits: research and development is costly, many new products fail, and new items can take sales from existing ones.

Diversification: new products in new markets.

• Value: spreads risk across unrelated income streams and can open fast-growing areas.
• Limits: the business has neither product nor market knowledge; it often needs new skills, assets and finance, so failure rates are high.

The matrix shows options and relative risk but does not say which to choose. That depends on objectives, resources, the SWOT position and the expected return.

Worked example: Orrisdale Cycles

Orrisdale runs bike hire and repair in one city. Its revenue is £2.1 million in a city cycle-services market worth £14 million. Four ideas are on the table:

1. A loyalty card giving every fifth repair free: market penetration.
2. Opening a branch in a second city: market development.
3. Guided cycling tours sold to existing hire customers: product development.
4. Opening a co-working café: diversification.

The founder wants penetration to lift market share to 20% next year, with the market expected to grow 5%.

Current share         = 2.1 ÷ 14 × 100 = 15%
Market next year      = 14 × 1.05 = £14.7 million
Revenue at 20% share  = 0.20 × 14.7 = £2.94 million
Increase needed       = (2.94 − 2.1) ÷ 2.1 × 100 = 40%

A 40% revenue rise in one year from a loyalty card in the same city is ambitious. The analysis suggests combining penetration with product development, which uses the existing customer base and adds a new revenue stream. Diversification into cafés uses few of Orrisdale’s skills and carries the most risk.

6. Implications for the functional areas

Strategy	Marketing	Operations	Human resources	Finance
Market penetration	Promotion, pricing, loyalty schemes	More output from existing capacity	Few changes; possible extra shifts	Low cost; may lower margins if price-led
Market development	Market research in new areas; adapted promotion and distribution	Logistics, local standards, possibly new sites	Local recruitment, training, cultural awareness	Set-up costs; currency risk if abroad
Product development	New product launch and positioning	New processes, suppliers, quality checks	New skills or retraining	R&D spending before any revenue
Diversification	Build awareness from nothing	New assets and processes	Recruit specialists; possibly new managers	Largest outlay; may need new external finance

7. Reasons for, and challenges of, changing strategy

Reasons a business changes strategy:

• External change: new competitors, falling demand, new technology, changes in law or the economy.
• Internal change: new leadership, new objectives, poor results, or new resources (for example, after raising finance).
• The current strategy is failing or has achieved what it can, such as a saturated home market.

Challenges:

• Cost and time: new assets, research and training before any return.
• Resistance from employees who fear job losses or new ways of working.
• Existing commitments: contracts, leases and stock tied to the old strategy are hard to unwind (strategic decisions are difficult to reverse).
• Culture and skills that suited the old strategy may not suit the new one.
• Stakeholder confidence: investors, lenders and customers may doubt the change.
• Uncertainty: the new strategy may also fail, and frequent changes confuse staff.

Managing these means clear communication of why the change is needed, involving staff, phasing the change and funding it properly.

Common errors

• Calling a short-term promotion a strategy: it is a tactic within a strategy.
• Placing a product sold to a new segment of the same country under market penetration: a new segment is a new market, so it is market development.
• Saying product development is “new products in new markets”: that is diversification.
• Using SWOT labels without the calculation or a benchmark behind them.
• Listing functional implications without linking them to the named strategy and business.
• Concluding “diversification is always too risky”: judge it against the business’s resources and the threats to its current markets.

For a shorter recap, use the revision notes, then test yourself on the practice questions. Product portfolio analysis feeds into these choices: see the 3.3.2 portfolio guide. Section 3.4.2 continues with strategic positioning.

Official syllabus

OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. Published by OxfordAQA.