OxfordAQA A-Level Business: Types of strategies (9725)

This guide follows 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. It teaches section 3.4.4 Types of strategies, part of 3.4 Business strategy. All of it is International A-level only content. If you are finishing the older 9625 specification, use your own specification, not this page.

Recall: revision notes · Test yourself: practice questions · Course hub: OxfordAQA A-level Business · Checklist: 9725 checklist · Find your gaps: free diagnostics

What this section covers

Spec area (3.4.4)	Content	Stage
Business growth	SMEs, economies of scale, growth methods, integration, retrenchment; total cost, unit cost, capacity utilisation	International A-level only
Innovation	Product and process innovation, ways to innovate, intellectual property, barriers	International A-level only
Globalisation	Trading globally, multinationals, offshoring and re-shoring, trading blocs, protectionism, market data, entry methods	International A-level only
Sustainability	Three types, challenges, Triple Bottom Line; margins, ROCE, labour turnover	International A-level only

How it is examined. Section 3.4 is assessed in Unit 4: Business strategy (1 hour 45 minutes, 80 marks, 30% of the International A-level): two compulsory sections, each a case study with five questions worth 40 marks. The specification’s quantitative skills appendix says each case study opens with a 4-mark calculation. Ratio skills come from the internal position guide; payback is in the strategic investment guide.

1. Business growth

SMEs (small or medium sized enterprises) fall below a size threshold of employees or turnover; use the case’s definition. Advantages: quick decisions, close customer contact, flexibility, low overheads. Disadvantages: higher unit costs, harder access to finance, dependence on a few people or customers, weak bargaining power.

Why businesses grow: lower unit costs, more market share and power, risk spread across products or markets, higher returns for owners, and survival against larger rivals.

Economies of scale are falls in unit cost as scale rises:

• Purchasing: bulk-buying discounts.
• Technical: larger, more efficient machinery that only pays at high volume.
• Financial: cheaper borrowing from more sources.

Diseconomies of scale are rises in unit cost when a firm becomes too large: problems of control (monitoring every part), communication (long chains of command distort messages) and coordination (sites and departments pull in different directions).

Total cost               = fixed costs + (variable cost per unit × output)
Unit cost                = total cost ÷ output
Capacity utilisation (%) = actual output ÷ maximum possible output × 100

Worked example 1: Brisgate Bottles

Brisgate has fixed costs of €540,000 a year, a variable cost of €0.30 a bottle, output of 1.8 million and capacity of 2.0 million.

Total cost = 540,000 + (0.30 × 1,800,000) = €1,080,000
Unit cost  = 1,080,000 ÷ 1,800,000 = €0.60
Capacity utilisation = 1.8 ÷ 2.0 × 100 = 90%

It acquires a second furnace: fixed costs rise to €900,000 and capacity to 4.0 million, and bulk-buying sand cuts variable cost to €0.26. It sells 3.2 million bottles.

Total cost = 900,000 + (0.26 × 3,200,000) = €1,732,000
Unit cost  = 1,732,000 ÷ 3,200,000 = €0.54 (nearest cent)
Capacity utilisation = 3.2 ÷ 4.0 × 100 = 80%

Unit cost falls about 9.8% (purchasing and technical economies). But at sales of 2.4 million, total cost is 900,000 + 624,000 = €1,524,000, unit cost €0.635 and utilisation 60%. Growth only pays if the new capacity is used.

Methods of growth

Organic growth uses the firm’s own resources: lower risk, keeps control and culture, but slow. External (inorganic) growth joins with another business: fast and buys share, brands or skills, but costly, risky and prone to culture clashes.

Method	Advantages	Disadvantages
Merger (two firms agree to combine)	Shared resources; fewer rivals	Culture clash; duplicated roles
Acquisition (one buys control of another)	Fast; buyer keeps control	Premium price; debt; staff resistance
Franchising	Rapid growth using franchisees’ capital	Profit shared; less quality control; brand risk
Joint venture (jointly owned project)	Shared cost, risk and local knowledge	Disputes; know-how may leak

Integration. Backward vertical: buying a supplier (a bakery buys a flour mill), securing supply and its margin. Forward vertical: buying a customer or outlet (a brewer buys bars), controlling distribution. Both can lock the firm into its own supplier or outlet. Horizontal: buying a firm at the same stage in the same industry; more share and economies of scale, but competition authorities may object. Conglomerate: buying into an unrelated industry; spreads risk, but managers lack expertise and savings are few.

Retrenchment is cutting back: closing sites, selling divisions, dropping products or making redundancies. Reasons: falling demand, losses, diseconomies, low capacity utilisation, a need for cash, refocusing on the core. Problems: redundancy costs, low morale among those who stay, lost skills, reputational damage and too little capacity if demand recovers.

Functional impact. Growth needs finance, recruitment and new structures, bigger capacity and supply chains, and wider marketing; retrenchment reverses each.

2. Innovation

Innovation is turning a new idea into a successful product or process. Its purpose is competitive advantage; its value is higher sales, premium prices or lower costs.

• Product innovation: a new or improved good or service, which can create a USP.
• Process innovation: a new or improved way of producing or delivering, which can cut costs and raise quality.

Pressures: rivals’ launches, changing tastes, short product life cycles, new technology, new laws and shareholder expectations.

Ways of becoming innovative:

• Kaizen: many small improvements suggested by staff. Cheap and low risk, rarely a breakthrough.
• Research and development (R&D): technical work to create and test new products and processes. Can produce breakthroughs; costly, slow and uncertain.
• Intrapreneurship: employees act as entrepreneurs inside the firm, with time and budget for their ideas. Motivating, but diverts time and many ideas fail.
• Benchmarking: comparing with the best performers and adopting what works. Clear targets, but you follow rather than lead.
• Cross-functional teams: marketing, operations, finance and HR staff on one project, so ideas are tested early for demand, cost and production.

Intellectual property. A patent lets the owner stop others using an invention for a set period; copyright protects original creative work such as software and designs; a trademark protects brand names and logos. IP earns a return before rivals copy and can be licensed for income, but costs money to register and defend, and a patent publishes the idea.

Example: Kestrava Robotics. A cross-functional team designs a gripper for soft fruit and Kestrava patents it. Marketing promotes a feature rivals cannot copy; operations retools; finance funds R&D before any revenue; HR recruits engineers.

Barriers: cost, risk of failure, short-term shareholder pressure, staff resistance, skills shortages, a risk-averse culture and easy copying.

3. Globalisation

Trading globally offers new markets when the home market is saturated, economies of scale, cheaper inputs and spread risk; it brings tougher competition, exchange rate risk and legal and cultural complexity. A multinational produces in more than one country: to be near customers, cut transport costs, get behind tariffs and use cheaper resources.

Factors influencing:

• Which markets to target: size and growth, incomes, competition, stability, trade barriers, culture, exchange rates.
• Whether to adapt the product: a standard product gives economies of scale; adapting to local tastes, laws or language may lift sales but adds cost.
• Where to produce: labour costs, skills, infrastructure, nearness to markets, tariffs. Offshoring moves production abroad, usually to cut costs; re-shoring brings it back when foreign wages or shipping costs rise, supply chains prove fragile, or quality and lead times suffer.
• International competitiveness: unit costs, quality, brand, innovation and the exchange rate.

Trading blocs are groups of countries that cut trade barriers between members. The EU is a customs union: no customs duties between members and the same tariffs on goods from outside. ASEAN members cut tariffs on trade within ASEAN, but each sets its own tariffs on outside goods. The USMCA is a free trade agreement between the United States, Mexico and Canada. Firms inside gain tariff-free access to a bigger market; firms outside may set up production inside.

Protectionism: a tariff taxes imports; a quota limits the quantity imported. Exporters lose sales or margin; domestic firms gain, though their imported inputs may cost more. See also the external environment guide.

Worked example 2: Ombrevale Tea compares two markets

Data	Country A	Country B
Top four firms’ shares	30%, 25%, 17%, 10%	14%, 12%, 11%, 8%
PED	−0.6	−1.5
YED	+1.8	+0.4
GDP growth forecast	3%	1%
Inflation	6%	2%
Unemployment	4%	9%
Interest rate	7%	3%

Four firm concentration ratio: A = 82%   B = 45%
Income effect on demand:       A = 1.8 × 3 = +5.4%   B = 0.4 × 1 = +0.4%
A, price +10%: demand −6%;  revenue 1.10 × 0.94 → +3.4%
B, price −10%: demand +15%; revenue 0.90 × 1.15 → +3.5%

Exchange rate. A pack sells for £4.00 and Country A uses euros. At £1 = €1.20 it costs €4.80. If the pound falls to £1 = €1.12, Ombrevale can cut the price to €4.48 (6.7% cheaper) or hold €4.80 and earn 4.80 ÷ 1.12 = £4.29, 7.1% more per pack.

Interpretation. Country A has rising incomes and inelastic demand, but four firms hold 82%, so entry is hard. Country B is fragmented and price-sensitive, suiting a low-price entry, but slow income growth limits demand. A’s 6% inflation raises local costs and erodes income gains; its 7% interest rate makes local borrowing dear. B’s 9% unemployment limits spending but eases recruitment. Market share is firm sales ÷ market sales × 100: £1.2m in a £40m market is 3%.

Methods of entry

Method	Advantages	Disadvantages
Export	Low cost and risk	Transport costs; tariffs
Licensing/franchising	Local partner invests; fee income	Less control; partner may become a rival
Joint venture	Partner’s knowledge and contacts	Shared profit; disputes
FDI	Full control; avoids tariffs	Highest cost, political and currency risk

4. Sustainability

Sustainability means running a business so that today’s needs are met while later generations can still meet their own. Customers, investors, staff and governments increasingly judge firms on it.

• Environmental: reducing waste and emissions, renewable resources, energy efficiency.
• Social: fair treatment of workers, supporting local communities, ethical sourcing.
• Economic: long-term profitability without exploiting resources or people.

Challenges: short-term costs, hard-to-measure impact, trade-offs with profit, supplier resistance, greenwashing accusations.

Triple Bottom Line (TBL) reporting covers people, planet and profit. It gives stakeholders a fuller picture and can attract customers, staff and investors, but social and environmental results are hard to measure and reports may be selective.

Worked example 3: Fallowmere Linen (£000)

                  Year 1                           Year 2
Revenue           4,800                            5,400
Gross profit      4,800 − 3,024 = 1,776 (37%)      5,400 − 3,294 = 2,106 (39%)
Operating profit  1,776 − 1,152 = 624 (13%)        2,106 − 1,458 = 648 (12%)
Net profit        408 (8.5%)                       432 (8%)
ROCE              624 ÷ 5,200 × 100 = 12%          648 ÷ 5,760 × 100 = 11.25%
Labour turnover   33 ÷ 220 × 100 = 15%             18 ÷ 240 × 100 = 7.5%

Each profit margin is that profit ÷ revenue × 100. Year 2 included fair-wage policies and energy-saving equipment. Operating and net margins and ROCE dipped, but labour turnover halved, cutting recruitment costs. Whether the strategy pays depends on whether the “people” and “planet” gains lift future profit.

Common errors

• Dividing total cost by capacity instead of actual output.
• Naming a diseconomy as “too big” without control, communication or coordination.
• Saying a patent protects a brand name (that is a trademark).

Next: practice questions and exam preparation.

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. Section 3.4.4 Types of strategies.